Afternoon roundup

The notables from the lunchtime closing of the browser tabs:

• Nancy Maclean thinks there's some kind of Koch - George Mason conspiracy to subvert democracy. To make her case, she misquotes Tyler Cowen and James Buchanan in ways that reverse the meaning of what they'd written. And here's more on Buchanan and racism. John Small takes issue with my liking James Buchanan; I don't trust a single thing in MacLean's book to be accurate, so I see no reason to go through the book and debunk it. 
• Seattle's $15 minimum wage reduced earnings among low-wage workers by cutting their hours. Here's the NBER paper.
• Dave Lane has an interesting suggestion: get tech students in high schools to provide the tech support. 
• Ontario has a messed up alcohol system. The Liquor Control Board runs all retail sales of hard liquor, and they're up against the Ontario Public Service Employees Union. One union's fight with one government monopoly retailer almost shut down Ontario's access to the good stuff. One might expect that unions have inordinate bargaining power in that kind of scenario. 
• Tim Harford has a great roundup on intellectual property issues. 
• The usual suspects are mad that there isn't a ban on having cartoon characters on cereal boxes. I don't know how you explain rising obesity with a fixed effect: cartoon characters have been on cereal boxes at least since the 1970s. Mum generally refused to buy the ones with the cartoon characters, taking it as a signal that they weren't as good for us. I can still hum the tune from the ads for Count Chocula and Frankenberry though. 
• Does inequality hurt economic growth? Maybe in less developed countries, otherwise not. Note too that where the route to riches is rent-seeking, you expect more inequality and less growth. 
• America moves a step closer to enabling supersonic passenger transport. Letting supersonics conform to the noise restrictions on older subsonic planes rather than the requirements on new planes would reduce fuel burn by allowing more aerodynamic engines. New Zealand should do the same if it wants to be ready when the new generation of supersonic passengers planes is ready. 
• Decentralisation doesn't work as well without fiscal equalisation. I liked this piece in National Affairs. I'll likely use it in the coming semester's Public Finance course I'm teaching at Victoria University. 

Underappreciated benefits of economic growth - back to the bog

What's economic growth ever done for me? Consider this Twitter thread from last night.

We had waxed toilet paper in the 1970s. It didn't wipe, just smeared it around.

— Will de Cleene (@ZippyGonzales) May 8, 2017

I was sceptical. Who would wax toilet paper? Why? Wax paper at the store is more expensive than regular paper, and waxing sure wouldn't make it more effective. But a lot of others chimed in confirming things. And I don't think it was a standard Kiwi wind-up either.

@ZippyGonzales @EricCrampton It was astounding. However you could purchase 'normal' paper in shops, so didn't understand why schools had to have the waxy stuff.

— Conan Gorbey (@arnie03) May 8, 2017

@ZippyGonzales It's ok. I'm remembering now. It wax in boxes. And it lasted well into the 80s. Was at Ak uni when I was there.

— Rob Hosking (@robhosking) May 8, 2017

@EricCrampton @ZippyGonzales I don't know if it was waxed or not, but it was about as absorbent as a toenail.

— Rob Hosking (@robhosking) May 8, 2017

Hey Twitter, I need some corroboration. Anyone went to school in the 1970s and experienced waxed toilet paper?

— Will de Cleene (@ZippyGonzales) May 8, 2017

@EricCrampton @ZippyGonzales Nope. Brown, shiny water repellent toilet paper was the order of the day at schools in the 70s

— DairyMan™ (@dairymanNZ) May 8, 2017

@EricCrampton As a member of the University of Auckland students assn execuitve I tried for 18 months in 72/73 to get rid of it. And failed.

— Ross Marks (@ross_marks) May 8, 2017

@EricCrampton I recall Fair Go had a manufacturer explaining the best way to use them: you rub two sheets together to provide the roughness for asswork

— Peter Metcalfe (@metcalph) May 8, 2017

 And Google Books found me this. Looks like it's a UK import.



So, better paper existed. But it wasn't purchased for use at public facilities because the UK, and NZ, were a lot poorer than they are now. Somehow, waxed paper was cheaper even if almost useless, and it was purchased because of the cost.

These kinds of quality improvements don't make it into the productivity statistics but they matter.

Elephant curves

I've seen the elephant curve in more than a few news stories about inequality. The curve suggests that while income growth has been strong in middle-income countries, income growth for the poor to middle class in rich countries has been very weak.

The Resolution Foundation dug into things and found that the trough is mostly dismal performance among former Soviet economies and Japan, with population growth and countries transitioning from fast growing developing countries into slower mature ones also playing a role. 

Here's the Financial Times on it.

Here's Resolution's Head of Research's tl;dr:

Tl;dr - population growth in EMs means a compositional effect which pulls down income around 80th percentile. pic.twitter.com/XdGcW3vvIG

— Duncan Weldon (@DuncanWeldon) September 13, 2016

Tl;dr 2: yes, Chinese & emerging middle class are the big winners of globalisation. But western low/middle earners aren't really losers.

— Duncan Weldon (@DuncanWeldon) September 13, 2016

Meanwhile, growth in household incomes in New Zealand remains broadly shared.

The kids are all right: NZ Edition

More than a few folks have emailed me the latest from The Guardian on the coming intergenerational war. Youth incomes have been going backwards in too many countries.

And so I pulled together what I could quickly get out of Stats NZ Census data.*

Here's what by-age median incomes look like in NZ, going back to 1991. It's all CPI adjusted to Q1 of the Census year, assuming a Q1 2013 final price. So $2013.


The x-axis has age cohorts. Note that the gap between the 2006 Census and 2013 is larger than usual due to the 2011 earthquake which displaced the normal census year; the great recession also fell during that period.

There was substantial real income growth from 2001 to 2006. Real median Census incomes between 2006 and 2013 only shows growth for old people. There's not been particular decline for youths, and certainly no decline over the period since 1991, with one exception. 15-19 year olds earned far more in 1991 than they did in any later period, with a sharp drop from 1991 to 1996 (which I'd put to increasing tertiary enrolment) and another sharp drop from 2006 to 2013 (which I'd put to the abolition of the differential lower youth minimum wage and consequent labour force exits).

Note further that New Zealand Income Survey data shows reasonable increases in by-age incomes from 2013 to present. 20-24 year olds had total real income growth of 11.8% from 2013 to 2015; 40-44 year olds only saw real income growth of 4%.

Age	2013	2014	2015
15-19	$0	$0	$0
20-24	$21,840	$22,533	$24,420
25-29	$35,360	$36,706	$37,369
30-34	$41,600	$40,275	$43,894
35-39	$41,600	$43,996	$46,035
40-44	$44,772	$45,933	$46,545
45-49	$44,876	$43,996	$46,443
50-54	$43,836	$44,200	$45,780
55-59	$40,508	$42,059	$42,161
60-64	$31,512	$31,353	$36,553

New Zealand Income Survey, median incomes by age, $2013.

New Zealand isn't doing too badly compared to the international experience. But the international experience isn't good. And New Zealand has a bad habit of just assuming that whatever's reported in the Guardian about the US or UK is also true here. Youths locked out of housing by the Auckland gerontocracy could be excused for not noticing their very real growth in real incomes as compared to the 1990s; it's all being eaten up by housing costs.

My worry is that imported narratives of stagnant wages (again, note the substantial increases 2013-2015 in NZ Income Survey data, contrary to the international experience) fuel demand for bad policy. The narratives are appealing here because it is easy to think back to the houses your parents could afford, and conclude you're worse off. But adults in their early thirties have real median incomes more than $16,000 higher than they had in 1991.

It's a problem with housing.



* You'd think it would be easy to get these kinds of long term series. I'm probably just bad at it, but I had to pull it out of a few different Census files, and I can't quickly find the 1986 census. The long term series don't have age-breakdowns, so it has to be culled from each Census. A job for another day.

Local regs, macro effects

What's the cost of bad urban planning policies? About 9.5% of GDP as a first cut, according to new work by Chang-Tai Hsieh and Enrico Moretti at NBER.

What's the mechanism? When productive cities make it hard to accommodate new workers, whether because of restrictive zoning downtown preventing densification or restrictions on the urban fringe, workers who could otherwise be more productive in moving to the more productive place instead can't; they're priced out and have to stay in less productive centres.

When we quantify the output and welfare cost of this increase in dispersion of the marginal product of labor, we find that aggregate output in 2009 would have been significantly higher if the dispersion of nominal wages had not increased. Holding the distribution of local TFP fixed at 2009 levels, we hypothetically reallocate labor from high wage to low wage cities such that the hypothetical wage in each city (relative to the average wage) is equal to the relative wage in 1964. Intuitively, this scenario involves setting amenities and housing supply at their 1964 level, while keeping labor demand constant at its 2009 level, and allowing workers to reallocate across cities in response. Under this scenario, aggregate yearly GDP growth from 1964 to 2009 would have been 0.3 percentage points higher. In levels, U.S. GDP in 2009 would be 13.5% or $1.95 trillion higher. This amounts to an annual wage increase of $8775 for the average worker.

The effect is driven by housing supply constraints rather than by compensating differentials due to disamenity effects from larger populations.

We estimate that holding constant land but lowering land use regulations in New York, San Francisco and San Jose to the level of the median city would increase U.S. output by 9.7%. In essence, more housing supply would allow more American workers to access the high productivity of these high TFP cities. We also estimate that increasing regulations in the South would be costly for aggregate output. In particular, we estimate that increasing land use regulations in the South to the level of New York, San Francisco and San Jose would lower U.S. output by 3%. 

And if central government is looking for justification for heavy-handed approaches to dealing with cities with restrictive zoning:

We conclude that the aggregate gains in output and in welfare from spatial reallocation of labor are likely to be substantial in the U.S., and that a major impediment to a more efficient spatial allocation of labor is the growing constraints to housing supply in high wage cities. These constraints limit the number of US workers who can work in the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers and amount to a large negative externality imposed by a minority of cities on the entire country.  

What sorts of policies?

In principle, one possible way to minimize the negative externality created by housing supply constraints in high TFP cities would be for the federal government to constrain U.S. municipalities’ ability to set land use regulations. Currently, municipalities set land use regulations in almost complete autonomy since the effect of such regulations have long been thought as only local. But if such policies have meaningful nationwide effects, then the adoption of federal standard intended to limit negative externalities may be in the aggregate interest. 

An alternative is the development of public transportation that link local labor markets characterized by high productivity and high nominal wages to local labor markets characterized by low nominal wages. For example, a possible benefit of high speed train currently under construction in California is to connect low-wage cities in California’s Central Valley -- Sacramento, Stockton, Modesto, Fresno -- to high productivity jobs in the San Francisco Bay Area. This could allow the labor supply to the San Francisco economy to increase overnight without changing San Francisco housing supply constraints.

So fix Auckland land supply, or put in a 200kph bullet train from Hamilton to Auckland CBD.

Update: to make very clear, whenever I say "land supply", I mean both allowing increased density in town and allowing expansion at the fringes. Land supply means land where you're not banned from doing what's economically appropriate. Height regulations block economically appropriate uses as can metropolitan urban limits.

Debating the case for economic growth

If you're in Wellington on 16 April, do join us for a fun evening. Chris Bishop, David Clark and James Shaw will be debating the Case for Economic Growth. I'll lead off with a brief discussion of the report, then we'll find out what the politicians make of it.

Please do register here if you're planning on attending.

The Case for Economic Growth

Jenesa Jeram and I have an essay out explaining the merits of economic growth. 

We released the piece at this year's New Zealand Initiative annual retreat last night in Auckland, with Finance Minister Bill English discussing economic growth as part of the launch. 

An excerpt from our essay:

3.1 GROWTH AND THE ENVIRONMENT: RICHER AND CLEANER 

For most pollutants, it got worse before it got better. 

Before the Industrial Revolution, the environment was far from pristine. Rivers were used as sewers. Indoor air pollution was particularly bad. Chimneys were not always particularly efficient, and open fires made for very smoky interiors. Rather than find a time machine, we can look to Tibetan nomadic tribes who use yak dung as winter fuel. Traditional cookstoves there make indoor air a health hazard and an underappreciated source of black carbon, which contributes to global warming.43 Early industrialisation made things worse: the outdoor air became smokier and rivers bore more sewage and waste to the sea. Economic growth brought greater prosperity but worse environmental conditions – especially in the cities. London’s pea-soup fogs became legendary but were not fantasy. Coal fires within the city, combined with industrial smoke, made for deadly conditions. 

Poor conditions were not limited to London. The New York Times of 9 December 1900 quotes Dr A.R. Edwards as being able to discern Chicago residents from those in the countryside, in post-mortem examination, by the condition of the lungs: “To lay the hand across the new-cut surface … of the lung would blacken the palm almost as black as to put it wet in a pan of soot”.44 

You can still see similar conditions today – not in London or Chicago or Pittsburg but in Beijing and China’s industrial cities. Historian Stephen Mihm draws strong parallels between the current industrial cities in China and the Western cities of the early- to mid-twentieth century.45 

This first-worse-then-better U-shaped relationship between economic growth and environmental quality is called the Environmental Kuznets Curve.

The curve was first described in 1991 by economists Gene Grossman and Alan Krueger, who wanted to test whether free trade between Mexico and the United States was likely to worsen or improve environmental quality in Mexico.46 Trade opponents argued that American industrialists would set up factories in Mexico to take advantage of less restrictive environmental regulations, exporting pollution. Grossman and Krueger argued instead that free trade would increase incomes in Mexico and consequently reduce pollution. 

Grossman and Krueger found that when per capita GDP reached US$4,000– $5,000 in 1985 dollars, or about US$10,000 today, sulphur dioxide and smoke levels started improving with economic growth rather than worsening. Mexican per capita GDP rose in real terms from about US$4,000 in 1992 to about US$10,000 in 2013. In 2010, a Washington Post headline announced: ‘Mexico City Drastically Reduced Air Pollutants Since 1990s’.47 If anything, Grossman and Krueger were too pessimistic about how long it would take for outcomes to improve. 

For pollutants with strong local effects, like nitrogen oxide, sulphur dioxide, and particulate matter like fine soot, the relationship holds well. For pollutants whose effects are less noticeable in the area generating the pollution, the effect is weaker.48
Environmental economist Susmita Dasgupta and co-authors reviewed the overall performance of the Environmental Kuznets Curve literature and, with some reservations, ultimately sided with the optimists.49 Dasgupta, et al. argued that the most plausible long-run forecast is for improved environmental quality in both high- and low-income economies. Economic liberalisation, improved information, better technology, and more stringent and cost-effective approaches to regulating pollution in developing countries have begun to ‘flatten’ the Environmental Kuznets Curve.

In short, economic growth now brings improved environmental quality earlier in a country’s development than it did when pollution control technologies were first being developed. 

It is easy to see how the Environmental Kuznets Curve effect works, and when it does not. When a city’s air is unbreathable, and when the city’s residents are rich enough to switch from coal heating, government regulation becomes an easy and effective way to solve the problem. Any one household switching away from coal heating to, say, gas heating, would experience all the costs of the switch, but because the problem is so vastly bigger than that one household, it would not notice any improvement in outdoor air quality. Things like the deadly London fog can spark change through policy – when city residents can afford alternatives. Economic growth both makes alternatives cheaper, through improved technology and widespread use, and encourages households rich enough to afford to do better. By contrast, a town with high greenhouse gas emissions is not necessarily a worse place to live than one with lower emissions: you cannot smell or taste the difference. Solutions then require national or international agreements rather than local action: any town, city or small nation imposing strong local restrictions would be in the same position as a London household choosing not to burn coal in the early 1950s, bearing all the local costs but not reaping any of the benefits. 

London’s smog led to a ban on coal-based heating. If Chinese carbon dioxide emissions drop with the Chinese government’s promise to reduce emissions from 2030 onwards,50 it will more likely be due to pressure on the government to deal with the effects of urban coal-burning than from any general commitment to climate change.
On the whole, then, the evidence on the Environmental Kuznets Curve is mixed. While economic growth reduces ‘local’ pollution, it does not mitigate pollution felt farther afield. 

And, as economist Bruce Yandle explains, strong property rights help make the link from economic growth to improved environmental quality.51 Strong property rights both increase income and provide ways for those affected by pollution to sue polluters for the damages caused. Yandle cites research showing that economic growth turns more quickly into improved environmental outcomes in countries with strong property rights. Would you rather be downstream from a factory making a mess of the river in New Zealand, or from a state-owned enterprise in China doing the same? 

The link between economic growth and environmental quality depends on strong property rights and a political system that lets individuals ‘buy’ better environmental quality as they get richer and can afford it. It is entirely right to worry about the effects of environmental regulation on economic growth, as it is possible to spend too much on anything – and doubly so when the government is doing the buying on our behalf. But the right amount of environmental quality does go up as people get richer and can afford it, both in their private decisions and policy preferences. 

The ongoing risk is in striking the right balance. Consider climate change and economic growth. While richer countries get a lot more economic output for every tonne of carbon dioxide released into the atmosphere, greenhouse gas emissions in total show little sign of reducing with economic growth. Or, at least, the world has not yet seen income levels at which the curve bends downward. Reducing greenhouse gas emissions may pass cost-benefit analyses, especially where it is viewed as buying insurance against the kinds of outcomes that, while unlikely, would be very harmful.52 Such reductions will come at a cost for economic growth. 

Substantial greenhouse gas abatement may be worth that cost, but it is critically important that we weigh the case fully. Wealth provides us a general purpose ability to deal with harmful outcomes. Curbing economic growth to reduce global warming necessarily leaves the world more vulnerable to other risks not associated with greenhouse gas emissions. 

We can think about it this way. Imagine you could either buy a house insurance policy that gives less-than-full protection against a range of threats such as fire, earthquake, typhoon, tornado, flood or landslide, or you could buy an insurance policy that makes sure you never suffer any damage from flooding but does not help you in case of anything else. Do you feel lucky?

I hope you enjoy it.

OECD on inequality

Whenever a small country gets mentioned specifically in an international report, that report there gets noticed.

A new OECD working paper claims that income inequality hurts economic growth, and particularly hurt New Zealand growth. Note that this is a working paper rather than OECD position.

Let's walk through their method a bit before discussing.

They use a new OECD panel to estimate effects. Growth, and everything else, is measured at five year intervals from 1970 to 2010.

Rather than use standard fixed-effect OLS modelling, they use a System Generalised Method of Moments approach. I've not used this approach before but here rely on their description: it combines first differenced equations with a set of lagged first-differences of the explanatory variables as instruments.

They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn't hurt growth, that changes in human capital (education) do not affect growth one way or another - there's a slightly negative effect of education on growth in the set of specifications, but it's not significant; and, investment doesn't affect growth one way or another.

The set of results is then a little surprising. We usually expect investment to matter a lot for growth - both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

Further, when they break things down a little, what seems to matter most is the difference between 4th decile income and average income rather than incomes at the top. Incomes in the 9th and 10th decile relative to average income do nothing; differences between the fourth decile and the average matter hugely.

And now we start getting into the plausibility checks. Does this set of results really make sense?

By what mechanism does a sharper gradient between income at the 40th percentile and average income translate into worse growth? Imagine that we took this as policy conclusion: increase the tax on average earners to give money to people slightly poorer than them. Does that seem reasonable? They argue that the effect runs through reduced investments in education in the lower decile cohorts when income inequality is higher, but they found no effect of education on growth. Further, the countries examined, like New Zealand, went through rather a few changes to tertiary education over the period - from free tuition to tuition to student loans. All of these would affect lower-tier access to education, and none are accounted for.

The paper goes on to argue that its results on education must be wrong because everybody knows that education matters, then makes a strong case not for income transfers, but for increased spending on education. And they hang that case on other papers finding a strong effect of education on growth - but that also find that inequality increases growth!

I've a specific concern also about the use of New Zealand in this time series. The potted history of New Zealand inequality and growth. New Zealand growth rates tanked from the late 1970s through the early 1990s as first Muldoonism then necessary restructuring put a pretty high cost on the economy. The Muldoon stuff was nonsense. The economic restructuring set the groundwork for strong growth in the 90s and through the 2000s, but was really really painful. It was painful for laid off workers, and it was painful for a whole pile of firms, both large and small, that had to reinvent themselves for an open and free market. Them ships don't turn on a dime, and so growth tanked.

At the same time as NZ growth rates tanked due to restructuring, incomes at the top jumped - in part due to changes in tax and accounting that brought some of that onto the books where it previously had been hidden, and in part due to that folks with the skills to adjust to the new environment started being compensated for it. That rise in inequality happened almost entirely from 1985 through about 1992, after which it wobbled around but didn't have systematic trends.

If we look then at a long run data series, we get a big increase in measured inequality in New Zealand at the exact same time as economic growth takes a nosedive. Once the growth in inequality stops around 1992: blammo! Growth starts again.

Is it any wonder, then, that a regression approach based on reduced form fixed effect estimation with no dummying out of the reform period or other adjustment for it would find huge effects of inequality on growth in New Zealand? It's stuff like this that's meant that more recent academic work, unlike OECD working papers, has been shifting to use of microdata within countries to try to figure out what's causing what. I don't think the OECD papers get us there.

I note that I have profited from conversations with Matt Nolan on this, though I'm to blame for all errors here.

Update: Here's me and Tim Hazeldine agreeing about the report's merits over at Morning Report.

Economic retrospective voting in dictatorships

Dictators have an interest in strong economic performance. In an Olson model, the dictator wants to maximize his total tax take, which generally means getting the underlying economic structure right but taxing at a rate that's too high from the perspective of maximizing GDP but just right from the perspective of maximizing the dictator's share of GDP.

But what happens when the dictator's tenure is at issue? Results then are less clear. If improvements in economic performance reduce unrest, then the dictator might tax less than would be otherwise optimal in order to lower his policing costs; if a strong economy builds alternative power bases that might provide threats to the dictator's position, then things are less clear.

ANU's Paul Burke looks at political survival in democracies and autocracies, finding that both autocrats and democrats are more likely to lose power when they preside over poor economic performance. In fact, they seem about equally responsive to economic conditions:

The LPM estimates in Table 10 provide no evidence that the short-run impact of economic growth on political survival differs between democracies and autocracies. Interestingly, the IV estimates suggest that the impact of the growth rate on next-year leader exit odds is smaller in democracies than autocracies, although the difference is only significant in the estimate in column 2 (and only at the 10% level). The IV estimates in columns 3 and 5-6 indicate that the short-run impact of growth on leader exits remains negative in democracies, albeit smaller (in absolute value terms) than that for autocracies.

Policy upshot?

Crisis assistance conditioned on the benevolence of national leaders may be valuable in shoring up the positions of benevolent leaders during times of economic hardship, while ensuring that corrupt or autocratic leaders do not receive relief from domestic political pressures at the very moment when these pressures are building in strength.

Crypto-optimism

Eli Dourado's excellent discussion of technologies of control and technologies of evasion reminds me of the anarcho-optimism of Cryptonomicon. Eli builds a business cycle story:

Here’s my model. First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Now, postulate some background rate of innovation. How many resources will be devoted to technologies of control and how many to technologies or resistance? The answer is that it depends on how invasive the state (or other monopolies) are. When the state is invasive, at the margin the incentive is to find ways to circumvent the points of control; a greater proportion of resources will go into technologies of resistance. When the state is non-invasive, at the margin the incentive is a purer maximization of production; a greater proportion of resources will go into technologies of control, which results higher growth.

Add in time-to-build or other frictions in shifting capital from technologies of control to technologies of resistance, and we get cycles.

I love the story, but I'm not sure how well parts of it match the stylized time path. Here's Eli:

So far, I’ve been pretty general about technologies of resistance, but I want to tie it back into McJolfsson’s story about rapid skill-biased technical change. The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.

Agreed. But surely American labour market regulation has been in decline since the late 1970s. I have a hard time seeing a big labour regulation shock anywhere in the 2000s that would have precipitated a dumping of labour. I suppose the shock has to come from technology reducing the costs of substitution more quickly than labour market deregulation reducing the need for such substitution. Do read Eli's full argument, which brings together Brynjolfsson's techno-optimist story with Cowen's Great Stagnation.

I'm a long term optimist on technologies of evasion. Eventually, something like BitCoin will be successful. Meanwhile, Patri is sparking more real-world hacks around control. The latest one: floating platforms 12 miles off San Francisco where foreign tech entrepreneurs could route around idiotic American immigration laws.

This immigration issue deeply affected the Blueseed team, of which two are immigrants (from Serbia and Romania), and the other is the son of Cuban immigrants. Rather than accepting the current reality, Dan tells us, "If U.S. policy hasn’t kept pace with the changing economic realities of the era, someone needs to find a solution that will help entrepreneurs come to Silicon Valley if they so desire. And that someone might as well be us. In other words, it’s time to stop complaining and start solving the problem."

On their website they state they plan to start accommodation prices off at around $1500 a month, and transportation will be provided to the mainland by a daily ferry. Internet connectivity will be provided via a point-to-point 40Gbps laser link with satellite link backup. They are also looking at additional backup solutions using submarine cable and potentially a series of WiMAX relay buoys. A visa is not required to earn a paycheck on Blueseed, and most residents will be able to travel back and forth to the mainland with a business/pleasure B1 Visa.

I worry that it will be really easy for the government to change a line of regulatory code to make it tough for Blueseed residents to commute back and forth; but, I'm also not sure that they'll face big pressure to do so and regulatory inertia would then work in Blueseed's favour. Until some California Congressman reckons the extra votes he gets from making a stink about platform-dwellers stealing jobs swamps the costs he'd impose on the tech industry.

A number I don't believe

Another plausible BERL estimate:

Given the make-up of the Auckland and Bay of Plenty regional economies, we illustrate the overall impact at a regional economy level of fast broadband from early roll-out and uptake. We estimate the productivity benefits of fast broadband could lift GDP by 7-9 percent above its business-as-usual level by 2025 if early roll-out, adoption and uptake is achieved. 

BERL's report on the benefits of broadband for Auckland is attached to the minutes of an Auckland Council Meeting.

I haven't the time to put into fisking this one. But a few bits of interest:

• They reckon the benefits to primary industry in the Bay of Plenty region is greater: "the estimated total regional benefit of broadband applications to the dairy production industry in the Bay of Plenty region is about $71 million. This is equivalent to about 7 percent of the export value of dairy product in the Bay of Plenty." Dairy can be made more productive by moving from zero internet to half-decent internet. Just imagine the benefits to Fonterra in being able to solve the Salesman problem if they have real-time access to milk volumes in the tanks at all the farms in the area. But I can't see how that's substantially better achieved at 10 mbps than at 500 kpbs.
• They figure the Auckland region's GDP, by 2025, is 1.8 billion dollars higher if broadband rolls out in 2012 instead of 2015. For NZ as a whole, we get a $4.7b boost. That's about a thousand dollars per capita. I can't believe that there's any difference a decade on that's discernible from noise.
• I can't help but suspect that there's rather a lot packed into the last two bits of "if early roll-out, adoption and uptake is achieved."
• They spend a fair bit of time highlighting the economic benefits of future growth in a bunch of industries where broadband hardly seems the binding constraint. Efficiency benefits of Kiwifruit farmers being able to file reports online with Zespri rather than paper forms hardly requires really fast broadband. I'm also not sure that broadband access is a bigger constraint for aquaculture than are regional consenting issues.

If the Auckland and Bay of Plenty Councils believe the results of the study they commissioned, I really hope that they go ahead and make the broadband investment using their own ratepayers' money rather than using the report to pressure Key into providing Auckland with what's mostly a private good.

HT: Henry Ergas, who's done great work debunking similar claims about Australia's national broadband network.

The magic washing machine

My mother explained the magic with this machine the very, very first day. She said, "Now Hans, we have loaded the laundry; the machine will make the work. And now we can go to the library." Because this is the magic: you load the laundry, and what do you get out of the machine? You get books out of the machines, children's books. And mother got time to read for me. She loved this. I got the "ABC." This is where I started my career as a professor, when my mother had time to read for me. And she also got books for herself. She managed to study English and learn that as a foreign language. And she read so many novels, so many different novels here. And we really, we really loved this machine.

And what we said, my mother and me, "Thank you industrialization. Thank you steel mill. Thank you power station. And thank you chemical processing industry that gave us time to read books."

So says Hans Rosling in a wonderful address cautioning against anti-global warming schemes that depend on denying washing machines to the third world.

Here's hoping Thorium works!

What should we do?

I'm on tonight for the Kim Hill moderated debate over at Lincoln University

Caroline Saunders opens for the "we have to have government reorganize our economy to deal with peak stuff" side. I'm after her. Then we move to general debate. With Caroline are Bob Frame from Landcare Research and Graeme Coles. With me are Ruth Richardson and Sharon Buckland (Chevron/Caltex).

Here's what I intend on delivering as opening for my side - I'm allowed 5-10 minutes. Comments and suggestions welcome. And even more welcome would be a few attendees at tonight's event. I'm very much expecting this to be an "away" game; it would be nice to have a few from my home team there in attendance. I expect subsequent debate to hit onto peak oil (futures prices on NYMEX show no evidence of it) and post-oil (Thorium and hydrogen, says me, but that's all a half century away). I've the Hotelling model in my back pocket as well. Here's the draft text.


Wealth, resilience and the environment
Address to the Kim Hill "Hot Energy Debate"; check against delivery.

Some days, it really looks like the world is ready to collapse. Caroline Saunders just gave a reasonable description of a lot of the problems we’re facing. Increased carbon output seems likely to increase global temperatures by a degree or two by the end of the century; sea levels may rise perhaps up to half a metre as consequence. Food price increases have hurt the world’s poorest. And oil supplies may run low sometime in the next fifty years.

And now we have to decide what to do about it all.

And there’s an awful lot we do have to do. But what we have to do depends on who the “we” is.

As individuals, “we” have all already started responding to the challenge. Oil prices have risen substantially over the last fifteen years. I remember when I was a grad student back in the Washington DC suburbs. Oil was a bit under $30 per barrel and petrol cost about $0.90 per gallon. That’s about $0.33 per litre. I drove a ’69 Buick Skylark with a V-8 and a 4-barrel carburetor that got about 12 miles to the US gallon – about eighteen litres per hundred kilometers. Since then, oil prices have risen to about a hundred dollars per barrel and petrol prices here are more than $2.00 per litre. As one of the “we”, I switched to driving a 2000 Honda Stream that uses less than half as much fuel – about 8.5 litres per hundred kilometers. And it isn’t just me – the broad trends are toward more fuel efficient vehicles and away from gas guzzlers. Nobody has had to tell us to do it – it just makes sense for our pocket books and so we have. And nobody’s had to tell Japanese car dealers to send us more of their smaller cars than of their bigger trucks – importers could tell what customers wanted and sorted things out as part of the distributed “we”.

As energy prices rise, “we” have moved to actually start insulating houses in New Zealand. It’s something Kiwis have been reluctant to do – best I can figure, you folks think there’s some kind of moral sanctity in wearing the itchiest woolen sweaters close to the skin; having a cold house gives you an excuse to do that. Well, with an insulated house, you can enjoy the itchy woolen sweaters with fewer space heaters. “We” have been switching to more energy efficient appliances. And “we”, as producers, have started building those more energy efficient appliances.

So the “we” as consumers have been responding to what prices are telling us about the world. Energy has become scarcer, as we can see by the price rises, and so “we” have responded by using less of it. And “we” as producers and entrepreneurs have responded by meeting that demand: coming up with new and better designs for vehicles. The new Boeing 787 Dreamliner uses 20% less fuel than the similarly-sized Boeing 767. And recent designs of double-D framed aircraft – nowhere near production as yet, but we could be there in twenty years – suggest fuel savings of around seventy percent. “We” as entrepreneurial designers and as corporations looking to reduce costs will make these designs a reality as fuel prices rise further.

All of these are things that “we” will do entirely of our own initiative and without any need for grand “master plans”. They’re the kinds of things “we” are doing already and will continue doing, simply by watching price signals.

Let’s think of the next bigger “we” – we as communities, towns, and cities that have to make some collective decisions. Much development from the mid twentieth century onwards was predicated on the idea that people wanted big suburban sections of land with low density use. And so “we” as communities put in place land use regulations preventing densification. Because land use couldn’t become more dense, cities built out. And as city planners got upset about seeing urban sprawl, they started putting in place green belts and metropolitan urban limits.

The combination of density restrictions and urban limits worked to massively inflate land prices and really kill a lot of poorer folks’ dreams of owning their own home. But it did well for suburban middle class folks who could afford a home and who wanted to keep the poor folks out of their neighbourhoods. If petrol prices are likely to rise substantially, “we” as communities are probably going to have to rethink our zoning density regulations.

I know a lot of people are really really keen on public transport solutions ranging from buses to light rail. But while “we” as voters and pontificators seem to like those ideas, “we” as commuters don’t. Except for really high population centres like New York, Boston and Washington DC, light rail and subways are overwhelmingly money sinks – people won’t use them unless they’re heavily subsidized. Why? Because they’re really inconvenient. They’re great for the single guy commuting from his house to his office. But for families who are making multi-point commutes – dropping the kids off at school, going to work, grabbing some groceries, getting the kids then going home – they’re impossible. And so they’re underutilized.

What can “we” do then, as communities, that meshes well with what “we” as individuals want to do? Change zoning to allow greater density and more mixed use. You don’t have to force anybody to do anything. Allow the development, and as people want it as prices move, entrepreneurs will provide it. The more commercial activity is allowed near residences, the more able people are to live near work. Denser housing provides an incentive for grocery stores to come in close to where people live, making for shorter trips to the store. And, this kind of dense, mixed use environment is precisely the kind of community that Jane Jacobs lauded as the most vibrant and liveable kind of place to be. More recently, economist Ed Glaeser has written a lot about how dense urban environments are not only some of the world’s most creative and innovative places – our engines of economic growth – but are also some of our most environmentally friendly places. Residents of downtown New York use far less energy than folks in the suburbs; it costs a lot less to heat an apartment than a suburban house, and folks in dense urban environments don’t need to drive as much.

Our zoning regulations have prevented it, and “we” as activists have worked to kill it by lobbying against rezoning of land in places like the New Brighton pier where densification could have shortened commutes, built communities, and provided additional hubs outside of the CBD that would have given us greater resilience in the face of natural catastrophes like the recent earthquake. The more of these hubs we allow to emerge by easing up on zoning, the more resilient we will be to a wide variety of challenges that might come.

The next bigger “we” is New Zealand as a country. What can “we” do there? The best we can do is to avoid screwing everything up. The further decisions are away from folks on the ground, the more likely everything is to turn pear shaped.

And boy are “we” good at making those kinds of disasters when “we” start acting through national policy. Through the 1990s in the States, folks really worried about the environment, peak oil, and global warming pushed really hard for policies mandating ethanol use in blended gasolines and big subsidies to ethanol production. The result has been the big spike in food prices that Caroline just showed us. Even Al Gore, the Senator who pushed hardest for those policies, has admitted they were a colossal mistake. “We” really need to guard against the damage that “we” can do when we all act together towards something that sounds good.

Caroline put up a slide showing the big increase in atmospheric CO2 concentrations over the last while. Imagine for a moment that a massive earthquake hit tomorrow that submerged New Zealand a mile below the sea, never to return. Now imagine the graph showing CO2 emissions for the next century. Would that graph be any different with the complete elimination of New Zealand as a country. No. The best you could hope for is that global CO2 concentrations might take a day or two longer to reach a given level a century hence. When you think about it that way, it helps to put into perspective what “we” as a country can do to slow global warming.

Now I know somebody’s going to come back at me and say we all have to do our part and that we can be a shining example unto others and the rest of the world will follow our lead. But that’s magical thinking. It’s just not going to happen. Instead, I argue that what “we” should be doing is looking at ways that we can help the rest of the world to reduce total emissions through technological change in areas where New Zealand already has a research advantage. We’re not likely to come up with the next innovative design for fuel saving aircraft. China is miles ahead of us in coming up with the next best source of power generation – Thorium fueled nuclear generators that produce next to no waste and cannot melt down because their reaction is fuelled by a photon beam that, if turned off, stops the reaction. Once China has built those, “we” might do well to allow a few reactors if they’re commercially viable and safe.

But what can “we” do that would have global benefit? Fund agricultural research into crops and livestock that produce less methane. We’ve already made a great start. The most we can hope for with our emission trading scheme is that our emissions reduce to zero – and that won’t make any difference in the grand scheme of things. But if we could take the resources that we’ve devoted to the emissions trading scheme and instead use them to fuel development of new agricultural technologies, and then give those technologies for free to anybody in the world who could use them – that could make a difference on a global scale. That’s where we should be looking if we want to make a real difference rather than just feel good about ourselves for making minor reductions in GHG emissions with a trading scheme. When a Canterbury guy tells you that the best we can do is give more money to Lincoln, you probably should listen.

Finally, “we” as a country can work hard to pursue policies that allow us to become wealthy. Global warming and “peak” whatever are not the only problems that can emerge. We’ve figured that out pretty well in the last six months or so. Whatever challenges emerge, the richer we are and the stronger economic base we have, the better placed we are to deal with whatever might come. If sea levels rise by more than we expect, we can build seawalls and move people to higher ground if we’re richer; we can’t if we decide that growth is a bad thing. We don’t know what challenges might come. But we’ll do better facing them if “we” don’t decide to hobble economic growth.

Stagnation?

Another for the contra-Cowen file: 23 and Me offers genotyping for $200. $200 gets you your genetic propensity for a hundred different diseases. And the $5 per month subscription gets you reports as new genetic info on disorders becomes available.

Maybe median incomes aren't rising much. But you sure can buy an awful lot more with a median income these days.

And one for the pro-Cowen file: Matt Ridley warns that the doctor cartel is trying to shut 23 and Me down, arguing that they should be the sole transmitters of health information.

Temporary and permanent shocks

Of potential relevance for Christchurch: German cities heavily bombed by the Allies saw only transitory effects on growth rather than permanent effects. At least for those cities lucky enough to be in the west and able to benefit from Ludwig Erhard's deregulation.

We construct a unique data set in order to analyse whether or not a large temporary shock has an impact on city growth. Following recent work by Davis and Weinstein on Japan, we take the strategic bombing of German cities during World War II as an example of such a shock, and analyse its impact on post-war German city growth. If the war shock has only a temporary impact, then there will be a tendency towards mean reversion. Our main finding is that the bombing had a significant but temporary impact on post-war city growth in Germany as a whole as well as in West Germany separately, but that this is not the case for city growth in East Germany.

It would make for a closer comparison if the fact of Allied carpet bombing in one city raised Germans' expectations that that city would again be carpet bombed at random draw time in the future. Effects could be a bit different.

On the other hand, if the Soviets were more likely to shell the cities that the Allies had previously bombed had WWIII ever transpired, then it might not be that bad a comparison.

In praise of economic growth

And today we give thanks for modern agriculture and international trade. It used to be much harder to get around local crop or herd failures:

A behavior can be adaptive without being an inherited biological adaptation, of course. But because starvation occurred with such regularity in our ancestral past, and because the starving mind predictably relaxes its cannibalistic proscriptions, and because eating other people restores energy and sustains lives, and because the behavior is universal and proceeds algorithmically (we eat dead strangers first, then dead relatives, then live slaves, then foreigners, and so on down the ladder to kith and kin), there is reason to believe—for Petrinovich, at least—that anthropophagy is an evolved behavior. The taboo against cannibalism is useful in times of health and prosperity; groups wouldn't survive very long if members were eating one another up. Yet starvation has a way of releasing the cannibal within.

In fact, starvation cannibalism may have been so prevalent in the ancestral past that it literally changed our DNA. Modern human populations appear to contain specific genetic adaptations designed to combat cannibalistic viruses.

HT: @ModeledBehavior

Agglomeration revisited

Ed Glaeser, earlier noted here, has more on agglomeration effects and growth. Glaesar recently edited a volume on agglomeration economics which I've yet to pick up; fortunately, he's now blogging some of it for the New York Times.

Contra the usual story, the internet isn't a substitute for physical location, it's a complement.

If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.
...
Other essays in the volume focus on the changing nature of agglomeration economies. Jed Kolko writes about services, which now dominate most United States urban areas.

Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.

In the penultimate essay in the book, Giacomo Ponzetto and I ask, “Did the Death of Distance Hurt Detroit and Help New York?”

Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.

Humanity is a social species and our greatest gift is our ability to learn from one another. Cities thrive by enabling that learning, and they have become only more important as knowledge has become more valuable. Understanding what makes cities work is more important than ever.

If this is right, then New Zealand is set for long term decline. Some folks argue that New Zealand's poor performance relative to Australia comes down to the Aussies having taken a different path to reform than the Kiwis. I'd worry more about agglomeration effects. Melbourne alone has roughly as many people as New Zealand. While population differences are a level effect across the countries, increased returns to agglomeration with technological change interacted with population ought be a growth effect.

If Glaeser's argument holds, then even the best policy in the world couldn't help us catch Australia, barring Australia doing anything monumentally stupid. That's not an argument for not trying, but rather for being realistic in expectations and for not damning reforms should they fail to help us catch Australia. It probably also points to dairy and agricultural production becoming more rather than less important relative to the tech sector. My confidence intervals around any of this are too wide for useful prediction, but I put a fair bit of weight on Glaeser having things basically right.

Failing the giggle test

British Prime Minister Gordon Brown says failure to reach a deal at the Copenhagen climate conference may trigger an economic disaster equivalent to the combined effects of the two world wars and the Great Depression.

Today's headline from Radio New Zealand.

Any of the folks talking about a twenty percent drop in GDP are talking about projections a century from now relative to a baseline where global warming didn't exist. They're not talking about the Great Depression tomorrow. And, you have to weigh the costs of that loss a century from now against the reduction in economic growth you'd have today if we implemented very costly measures against warming today. If you set the discount rate to zero, or if you care a lot about guarding against the lower chance of the worst outcome, then spending more now makes sense; otherwise, it doesn't.

But Brown's presenting it as though the policy alternative is costless and the costs of inaction are incurred very soon. Given that the mean expected economic costs of global warming at reasonable discount rates aren't that far from the mean expected economic costs of implementing carbon mitigation regimes, you could just as easily predict economic disaster from a carbon tax. Small reductions in economic growth rates have large cumulative effects....

Growthgate and Climategate

William Easterly notes parallels between climate research and research on economic growth.

There were three steps in the the great History of Evolving Cluelessness:

1. Economists spent the past two decades trying every possible growth determinant in sight. They found evidence for 145 different variables (according to an article published in 2005). That was a bit too many in a sample of only about one hundred countries. What was happening is there would be evidence for Determinants A, B, C, and D when tried one at a time to explain growth. But the evidence for A disappeared when you also controlled for some combination of B, C, and D, and/or vice versa. (Interestingly enough, foreign aid never even merited inclusion in the list of 145 variables.)


2. The Columbia economist Xavier Sala-i-Martin and co-authors ran millions of regressions on all possible combinations of 7 variables out of the many possible determinants of growth. Skipping a lot of technical detail, they essentially averaged out the millions of regressions to see which determinants had evidence for them in most regressions. There was hope: some were robust! For example, the idea that malaria prevalence hinders growth found consistent support.


3. This new paper by Ciccone and Jarocinski found that every time the growth data are revised, or if the sample is changed to another equally plausible one, the results vanish on the “robust” variables and new “robust” variables appear. Goodbye, malaria, hello, democracy. Except the new “robust” determinants are no longer believable if minor differences between equally plausible samples changes what is robust. So nothing is robust.

There are two possible ways to describe what had happened over the past two decades:

1. The growth research was at least partially fraudulent, in that we researchers were searching among many different econometric exercises till we got the “determinants of growth” we wanted all along.


2. There was a good faith effort by us researchers to test different theories of growth, which led to some results. We didn’t realize until later that these results were not robust.

Description (1) would be a “GrowthGate,” but since so many people would be guilty (of “data mining”), and since we really can’t tell for any individual study or researcher whether it was (1) or (2), “GrowthGate” never became a story.

It's rather worrying if the Sala-i-Martin variables prove non-robust across new iterations of the Penn World Tables. Minor errors in data seem to blow the technique apart.

Genetic distance in war and economics

It turns out that folks kinda hate their genetic neighbours.

Enrico Spolaore was one of the keynote speakers at the Australasian Public Choice Society Meetings in Melbourne last week. I'd not before seen his work on genetic distance, but it's rather interesting.

Genetic distance measures the number of generations back you have to go before two populations share common ancestors. So if two populations diverged only a very short time ago, like the Danes and the English, their measured genetic distance is short; if they diverged a very very long time ago, like the Australian aborigines and the Mbuti Pygmies of Africa, their measured distance is long. While this is related to geographical distance, it's far from perfectly correlated: Canada's Inuit are closer to Tibetans than they are to any of the other Amerindians; the English are closer to the northern Indians than they are to the Lapps (Finish); the Mongols are closer to the Japanese than they are to the Chinese; the Indians of south east India are closer to the Italians than they are to the Thai people or the South Chinese.

Spoloare and Wacziarg find that this measure of genetic distance predicts whether two populations will go to war, after controlling for the usual set of determinants of conflict like geographical proximity, shared borders, income differences, religion, language, and so on. All else equal, the more two populations are genetically proximate, the more likely they are to go to war and the less likely they are to vote together at the UN. If current patterns of war have affected measured genetic distance, then causality may be wrong, but they use genetic distance as of year 1500 as an instrument.

I'd worried that results might be drawn from a few places that have been strategically important going back well before 1500. For example, if the bridge from Africa to Asia Minor via Sinai and Israel has been strategically important for thousands of years and if similar populations have lived around there for a long time, then the correlation of genetic distance and conflict could have things the wrong way round: frequent conflicts in strategic regions bring genetic mixing, and if the regions' strategic importance continues from well prior to 1500 to present, then it wouldn't be that folks want to fight with their genetic neighbours, but folks who fight a lot become genetic neighbours. Controlling just for having a common border or just for geographical distance wouldn't quite cut it. But they find that the effect also holds for country pairs that do not share a border.

Why might we fight more with our nearer than our more distant cousins? Spolaore suggests that genetic closeness makes it more likely that we'd be in conflict over rivalrous resources. I wonder whether we couldn't imagine a pleistocene explanation: if there's a fertility advantage to outbreeding but not too far (the sweetspot between inbreeding depression and outbreeding depression), then our ancestors 90,000 generations back on the Savannah who raided more closely related neighbours would have had a slight advantage over those who raided groups too genetically distant. Run the mechanism for 90,000 generations, and you've a population that's keyed to want to raid folks who are more like them.

In the May QJE, Spolaore and Wacziarg found that genetic distance from the United States explains cross country income differences after correcting for geographical distance, climate, transportation costs, and measures of social distance (historical, religious, linguistic). Again, they argue that genetic distance may be the best measure of "slowly changing genealogically transmitted characteristics, including habits and customs" - the bits of culture we can't adequately otherwise measure. That's certainly possible, and cuts against my evolutionary biology explanation above, mostly because it's hard to come up with an ev bio explanation of why genetic distance from the US would correlate with income differences. The best explanation I'd have would be that it's proxying for differences in average IQ: also somewhat genetic, but at some of the more depressed ends of the scale almost certainly highly environmentally influenced). But that would be a bit of a wash: there are genetically distant places above the US (Hong Kong) and far below the US (Equatorial Guinea) in reported average national IQ. Spolaore's culture explanation seems the more plausible.

Spolaore gave one of the best plenary addresses I've ever seen. If you get a chance to see him give a talk, go.