The Mob Lost and the System Won

 

On June 12, I posted briefly about the efforts of Justin Wolfers and other economists to get Harald Uhlig fired from his position as editor of the Journal of Political Economy.

Here’s what I wrote:

I don’t know if he should be fired. I don’t know enough about how good an editor he is, which, in my view, is the only thing that should matter. Justin hasn’t made a case that he’s a bad editor. Rather, Justin doesn’t like what the editor, Harald Uhlig, said about Black Lives Matter(ing).

That same day the University of Chicago placed Uhlig on leave as editor of the journal while it investigated the case. On June 22, the University announced that it had “completed a review of claims that a faculty member engaged in discriminatory conduct on the basis of race in a University classroom.  The review concluded that at this time there is not a basis for a further investigation or disciplinary proceeding.” It presumably investigated the more serious charge made  by a former student that Uhlig had engaged in inappropriate behavior in a class the student attended. The student, Bocar A. Ba, tweeted:

I sat in your class in Winter 2014: (1) You talked about scheduling a class on MLK Day (2) You made fun of Dr. King and people honoring him (3) You sarcastically asked me in front of everyone whether I was offended Here is the receipt.

That was presumably what the University investigated.

I wrote Dr. Ba on June 13 to find out more about his allegation. He did not reply.

On June 23, Alice Yin, a reporter with the Chicago Tribune, wrote a news story about the investigation’s outcome. She writes:

Ba, who previously told the Tribune he wants to focus on his work, declined an interview, as did other academics who tweeted that they witnessed the apparent incident.

So this time the mob lost and the system won. By “system won,” I mean that the University seems to have investigated the serious charge and ignored the tweets that led to the original upset of Justin Wolfers and others, and, presumably finding not a clearcut case against Professor Uhlig, returned him to his job as editor.

I emphasize that I hold no brief for Professor Uhlig. I don’t know him and I don’t even know if I would like him if I did know him. I probably would because I like most people. But that’s not the point. People should not be axed from such jobs without good reasons for doing so. Highly inappropriate comments in class might be such a reason; sarcastic tweets are not.

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The Fantastic Unemployment Numbers!

 

Possibly because of the long weekend and possibly because the unemployment numbers don’t make Donald Trump look bad, there hasn’t been as much commentary as I had expected on the June unemployment numbers.

Here’s mine: They are fantastic!

Here’s the BLS release.

Now for some highlights.

Nonfarm payroll employment rose by 4.8 million in June. I’m not sure  but I’m pretty sure that this is a record increase. The previous, month, May, it was a whopping 2.5 million. So June’s number is almost double May’s increase.

The unemployment rate fell from 13.3 percent in May to 11.1 percent in June, a drop of 2.2 percentage points.

The number of people unemployed fell by a whopping 3.2 million. I think that’s a record drop also.

The labor force participation rate rose by 0.7 percentage point.

The employment to population ratio rose by 1.8 percentage points.

In thinking that the major recovery would not start until the added $600 per week federal unemployment ended (it ends at the end of July), I was too pessimistic.

I do think, though, that if Congress had not passed that benefit in March and had Donald Trump not signed the legislation, the unemployment rate today would be in high single digits, not low double digits.

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Reforming unemployment insurance

People rarely stop to think about just how bizarre our unemployment insurance system actually is. Imagine if automobile insurance worked as follows. After an accident, the insurance company paid you $400 dollars for each week that your car was out of commission, up to 26 weeks.

That system would obviously encourage people to delay repairing the car. This is why insurance companies pay the insured a lump sum, right after the accident. I’ve long advocated the same system for unemployment insurance, in order to reduce work disincentives.

Instead, the disincentive to work was actually increased by the UI reforms in the recent CARES Act. Some of the changes may have been beneficial, such as extending UI to independent contractors. But it’s hard to justify paying people who don’t work more than they received on their previous job, even during times when jobs are hard to come by.

A new study by Attila Lindner and Balázs Reizer suggests that paying UI as a lump sum after the “accident” of job loss could be a win-win proposition.  Here’s the abstract:

We estimate the effect of front-loading unemployment benefit payments on nonemployment duration and reemployment wages. Exploiting a sharp change in the path of benefits for those who claimed unemployment benefits after November 1, 2005 in Hungary, we show that nonemployment duration fell by two weeks, while reemployment wages rose by 1.4 percent as a result of front-loading. We show that these behavioral responses were large enough to offset the mechanical cost increase of the unemployment insurance. We argue that our results indicate that benefit front-loading was a Pareto improving policy reform as both unemployed and employed workers were made better off.

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Oksana Boyko Interviews Henderson on RT

The interview went 28 minutes and is here.

I won’t do my usual time-stamping because I’m busy with other things.

What I will point out is that approximately the first half is on my Wall Street Journal article, co-authored with Jonathan Lipow, that analyzed the findings of the major cost/benefit analyses of lockdowns and other measures that were in response to the coronavirus. We get into an interesting discussion of the value of a statistical life. It also gave me a chance to use the main thing I took away from my debate with Justin Wolfers back in April: how the concept of least-cost avoider strengthens the case against lockdowns.

The second half is about my latest article for Hoover’s Defining Ideas, “Black Livelihoods Matter,” Defining Ideas, June 17.  We get into the minimum wage, Senator John F. Kennedy’s racist case for increasing the minimum wage, occupational licensure, how restrictions on housing supply drive up housing prices in San Francisco, Los Angeles, New York City, and other cities, and charter schools. Early in the second half, I dealt briefly with the issue of white privilege.

Also, right at the end, I get in a major criticism of mega-murderers Chairman Mao and Joseph Stalin.

Oksana Boyko did her homework and so the result was an excellent conversation.

P.S. I wanted to do a screenshot at the 1:27 point that shows both Oksana, me, and my Rocky movie poster, but with my new MacBook Pro, I couldn’t figure out how.

 

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AEA Admits It Doesn’t Know the Literature

We recognize that we have only begun to understand racism and its impact on our profession and our discipline.

This is an astounding statement from the “officers and governance committees of the American Economic Association,” published June 5. Here’s the whole statement.

Like them, I don’t know much about racism’s impact on the economics profession or on the discipline. But unlike them, I have gone far beyond beginning to understand racism.

One of the earliest contributions to the understanding of racial discrimination was Gary Becker’s book The Economics of Discrimination, written in 1957 and based on his Ph.D. dissertation at the University of Chicago. One of Becker’s main contributions in that book was the idea that when an employer discriminates on a basis other than productivity, he misses out. Becker’s point was not that therefore employers would not discriminate but rather that the free market makes them pay a cost for discriminating.

In 1962, Armen Alchian and Reuben Kessel found, consistent with Becker’s model, that when governments regulate firms’ profits, as they do with utilities, the utilities have a diminished penalty for discriminating and, therefore, discriminate more.

Are these high-level people in the American Economic Association unfamiliar with this literature?

 

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The Detroit Cops’ Violent Attack on Black Capitalism

 

A lot of people who write about the Detroit riot of 1967 have missed what was in plain sight. The Kerner Commission’s report of 1968, which examined the causes of the riot, laid out some important facts but missed their significance.

Here’s what I wrote in my book The Joy of Freedom: An Economist’s Odyssey in a chapter titled “Free Markets versus Discrimination.”

 

During a five-day period in July 1967, 43 people were killed during a riot in Detroit’s inner city.  President Johnson then appointed the National Advisory Commission on Civil Disorders, the so-called Kerner Commission, named after the then-governor of Illinois who headed it–to look into the causes of that and other riots during the summer of 1967 and to make recommendations that would prevent such riots in the future. When its report came out in 1968, it made a big splash.  The report stated that black poverty was a big cause of the Detroit riots, and its recommendations for more government jobs and housing programs for inner-city residents were explicitly based on that assumption.  These recommendations are what received much of the publicity at the time and are what most people took away from the report.  Too bad more people didn’t actually read the report. The Commission’s own account of the Detroit riot tells a different story. Here’s the report’s first paragraph on Detroit:

On Saturday evening, July 22, the Detroit Police Department raided five “blind pigs.”  The blind pigs had their origin in prohibition days, and survived as private social clubs.  Often, they were after-hours drinking and gambling spots.

These “blind pigs” were places that inner-city blacks went to be with their friends, to drink, and to gamble; in other words, they were places where people went to peacefully enjoy themselves and each other.  The police had a policy of raiding these places, presumably because the gambling and drinking were illegal.   The police expected only two dozen people to be at the fifth blind pig, the United Community and Civic League on 12th Street, but instead found 82 people gathered to welcome home two Vietnam veterans, and proceeded to arrest them.  “Some,” says the Commission report, “voiced resentment at the police intrusion.”  The resentment spread and the riot began.

In short, the triggering cause of the Detroit riot, in which more people were killed than in any other riot that summer, was the government crackdown on people who were going about their lives peacefully.   The last straw for those who rioted was the government suppression of peaceful, albeit illegal, black capitalism.  Interestingly, in its many pages of recommendations for more government programs, the Commission never suggested that the government should end its policy of preventing black people from peacefully drinking and gambling.

The government’s fingerprints show up elsewhere in the Commission’s report.  Urban renewal “had changed 12th Street [where the riot began] from an integrated community into an almost totally black one…” says the report.  The report tells of another area of the inner city to which the rioting had not spread. “As the rioting waxed and waned,” states the report, “one area of the ghetto remained insulated.”  The 21,000 residents of a 150-square-block area on the northeast side had previously banded together in the Positive Neighborhood Action Committee (PNAC) and had formed neighborhood block clubs.  These block clubs were quickly mobilized to prevent the riot from spreading to this area.  “Youngsters,” writes the Commission, “agreeing to stay in the neighborhood, participated in detouring traffic.”   The result: no riots, no deaths, no injuries, and only two small fires, one of which was set in an empty building.

What made this area different was obviously the close community the residents had formed. But why had a community developed there and not elsewhere?  The report’s authors unwittingly hint at the answer.  “Although opposed to urban renewal,” the Commission reports, “they [the PNAC] had agreed to co-sponsor with the Archdiocese of Detroit a housing project to be controlled jointly by the archdiocese and PNAC.”  In other words, the area that had avoided rioting had also successfully resisted urban renewal, the federal government’s program of tearing down urban housing in which poor people lived and replacing it with fewer houses aimed at a more upscale market. Economist Martin Anderson, in his 1963 book, The Federal Bulldozer, showed that urban renewal had torn down roughly four housing units for every unit it built.  The Commission, instead of admitting that urban renewal was a contributing factor, recommended more of it.  Their phrasing is interesting, though, because it admits so much about the sorry history of the program:

Urban renewal has been an extremely controversial program since its inception.  We recognize that in many cities it has demolished more housing than it has erected, and that it has often caused dislocation among disadvantaged groups.

Nevertheless, we believe that a greatly expanded but reoriented urban renewal program is necessary to the health of our cities.

In short, the commission’s remedy for poison was to increase the dosage.

 

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The Bad and the Great News about Unemployment in May

 

My economist friend Jack Tatom wrote the following on Facebook and gave me permission to share. For background, see my “Why the Drop in Unemployment Did Not Surprise Me,” June 5. It’s pretty involved and you might have to pause at various points to take it in, but it’s by far the best explanation I’ve seen. Here goes:

On Friday, June 5, the Bureau of Labor Statistics (BLS) announced the Employment Situation for May showing that the nation’s unemployment rate had declined in May from 14.7 percent to 13.3 percent, a shock to many who had expected a fall in employment of over 9 million and a rise in the unemployment rate to 20 percent. I was not among the shocked. I had expected employment to rise very sharply due to a reduction in the number unemployed.

The BLS added a footnote to their May report that indicates there had been an error in data submitted by survey takers who had counted many people as employed instead of as unemployed. The latter was the explicit instruction BLS had given for the treatment of furloughed workers who did not work during the previous week. According to the BLS, had the surveys been correctly completed, the April unemployment rate would have been shown as 19.7 percent and the rate would have fallen to 16.3 percent in May. [DRH note: Note that that still is a large fall in the unemployment rate; I believe it’s the largest one-month fall in recorded U.S. history.]

So, what happened and what does this mean? First of all, it means that in both months unemployment and the unemployment rate were higher than previously thought. That’s the bad news. The 20 percent unemployment rate expected for May nearly occurred in April. The good news is that this data shows the turnaround in the economy was actually bigger than the official data indicate. The official reported data show a decline of 1.4 percentage points in the unemployment rate; the actual decline that the BLS indicates occurred is more than twice as large as the official data shows.

Based on the data released, my calculations indicate approximately 7.7 million furloughed workers were “mistakenly” treated as employed in April but should have been treated as unemployed. Instead of the 18.1 million reported in Table A-11 of the Employment Situation for April, the correct number was about 25.8 million. In May, the Table A-11 shows a 15.3 million on-furloughed reduction in the overall number unemployed. Using the revised data based on the footnote to the BLS report, it now appears that the decline in unemployment in May due to falling numbers of unemployed workers on temporary layoffs was 5.7 million workers instead of the officially reported 2.7 million. This larger return of furloughed workers to employment again accounted for more than all of the approximately 5.0 million increase in overall employment implied by the footnote. Five million more workers returning to work in May is dramatically more than the continuing decline expected a week ago by others or even the 2.1 million official gain reported on Friday. That is not good news; it is great news.

What about the decline in employment expected by nearly all analysts and the press? Buried in all these numbers is a decline in employment for workers who were not on furlough that was swamped by the return of formerly furloughed workers. In the official data, the reduction of unemployed and furloughed workers was 2.7 million, but the reduction in the unemployed was 2.1 million. The difference is others who were not furloughed but added to the number unemployed. When the corrected measures are used, furloughed workers declined by 5.7 million, larger by about 0.7 million than the overall approximate number of 5 million reduction in overall unemployment (different from official measures due to rounding error). So there was a decline in employment in May that was overwhelmed by the return of furloughed workers observed in April and back in employment by May.

Where do we go from here? Depends on to whom “we” refers. The BLS official view is not to tamper with suspected errors in the collected surveys. So, whether BLS will adjust the official data in the future remains to be seen. But where the economy goes is more certain. Given the opening of states’ economies in late May and early June, the accelerating opening of businesses suggests even larger increases in employment and declines in the unemployment rate in June and the rest of the summer.

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Why the Drop in Unemployment Did Not Surprise Me

 

Yesterday on Facebook, I commented on someone’s post that I expected the unemployment rate for May reported today to be below 15 percent. I was right. It declined from 14.7 percent to 13.3 percent.

Why did I think that? Because a day earlier I had read an excellent article by my FB friend (and actual friend) Jack Tatom, a first-rate economist who spent much of his career at the St. Louis Fed. I got to know him during the glorious 6 months in 1994 when I was at the late Murray Weidenbaum’s Center for the Study of American Business at Washington University in St. Louis.

The article is Jack Tatom, “Don’t believe the overstated ‘headline estimates’ of unemployment,” The Hill, June 2.

Here’s an excerpt:

Since COVID-19 deaths began to rise in mid-March, people have awakened every Thursday to the latest report of the number of unemployed associated with virus-related shutdowns. A recent “headline estimate” of job loss was 40.8 million people, but a more reasonable and accurate number is less than half that. The overstated loss in employment of 23 million people is large and grows every week.

The headline estimate is based on adding the number of “initial claims” for unemployment compensation, filed with state unemployment insurance offices each week, to the total from the week before. The report is issued by the U.S. Department of Labor’s Employment and Training Administration for the week ending the previous Saturday. But each week, the same report includes the continued claims for unemployment — called insured unemployment — which includes those who claim they were unemployed for at least a week and who are due unemployment compensation.

People who file initial claims are often subsequently revised off the rolls because their claim was invalid or because they obtained jobs before they could claim their first weekly benefit. Each week some of the past unemployed drop out of the “continued claims” data because they find new jobs or, these days, are called back to existing ones, and are no longer eligible for unemployment compensation.

I had been like many people in adding the weekly unemployment insurance claims. I had thought that pretty much everyone who applied for unemployment insurance got it and also that very few of those people would have been called back to work by now. It looks as if I was wrong on both counts. That’s why I quickly revised my view on Wednesday.

Now it’s true that nowhere in the article does Jack say that the number of new jobs would rise by over 2 million. I’m guessing he expected a rise–my own gut feel was 500,000–but I’m guessing also that this rise surprised him. What’s not that surprising is that the unemployment rate fell.

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Herd immunity was never a feasible option

Bryan Caplan has a post on Covid-19 that is full of sensible ideas. But I disagree with one of his claims:

18. Alex Tabarrok is wrong to state, “Social distancing, closing non-essential firms and working from home protect the vulnerable but these same practices protect workers in critical industries. Thus, the debate between protecting the vulnerable and protecting the economy is moot.” Moot?!  True, there is a mild trade-off between protecting the vulnerable and protecting the economy.  But if we didn’t care about the vulnerable at all, the disease would have already run its course and economic life would already have strongly rebounded.  Wouldn’t self-protection have stymied this?  Not if the government hadn’t expanded unemployment coverage and benefits, because most people don’t save enough money to quit their jobs for a couple of months.  With most of the workforce still on the job, fast exponential growth would have given us herd immunity long ago.  The death toll would have been several times higher, but that’s the essence of the trade-off between protecting the vulnerable and protecting the economy.

From my vantage point in Orange County, that just doesn’t seem feasible.  People here are taking quite aggressive steps to avoid getting the disease, and I believe that would be true regardless of which public policies were chosen by authorities.  Removing the lockdown will help the economy a bit, as would ending the enhanced unemployment insurance program.  But the previous (less generous) unemployment compensation program combined with voluntary social distancing is enough to explain the vast bulk of the depression we are in.

In many countries, the number of active cases is falling close to zero.  In those places, it will be possible to get people to return to service industries where human interaction is significant.  Speaking for myself, I’m unlikely to get a haircut, go to the dentist, go to a movie, eat in a crowded restaurant, or many other activities until there is a vaccine. (Although if I were single I’d be much more active.) If I were someone inclined to take cruises, I’d also stay away from that industry until there was a vaccine.  I’ll do much less flying, although I’d be willing to fly if highly motivated.  For now, I’ll focus on outdoor restaurants (fortunately quite plentiful in Orange County) and vacations by automobile. Universities are beginning to announce that classes will remain online in the fall.

If you think in terms of “near-zero cases” and “herd immunity” as the two paths to normalcy in the fall of this year, I’d say near-zero cases are much more feasible.  Lots of countries have done the former—as far as I know none have succeeded with the latter approach.  Unfortunately, America has botched this pandemic so badly (partly for reasons described by Bryan) that it will be very difficult to get the active caseload down to a level where consumers feel safe.

Don’t get me wrong, both the lockdown and the change in unemployment compensation create problems for the economy.  But they are not the decisive factor causing the current depression.  If the changes in the unemployment compensation program were made permanent, then at some point this would become the decisive factor causing a high unemployment rate.  But not yet.

BTW, I am not arguing that it wouldn’t be better if people had a more rational view of risks, as Bryan suggested in a more recent post.  This post is discussing the world as it is.

Here’s a selection of countries with 35-76 active cases (right column), followed by a group with less than ten.  Many are tiny countries and some have dubious data, but not all.

. . .

 

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