Why the welfare state works

I have a new piece at HBR in which I review the research on the backgrounds of inventors and suggest that a more equitable society is the way to make the U.S. more innovative — not tax cuts. I see it as broadly in line with my writing on entrepreneurship and the welfare state.

I’ve also written a bit in the last year on redistribution and why it works. In that last link I cited Peter Lindert, and via Justin Fox I’ve found myself reading another of his papers. Here are some bits worth sharing:

This paper dramatizes a conflict between intuition and evidence. On the one hand, many people see strong intuitive reasons for believing that the rise of national tax-based social transfers should have reduced at least GDP, if not true well-being. On the other, the fairest statistical tests of this argument find no cost at all. Multivariate analysis leaves us with the same warnings sounded by the raw historical numbers. A bigger tax bite to finance social spending does not correlate negatively with either the level or the growth of GDP per capita. How can that be true? Why haven’t countries that tax and transfer a third of national product grown any more slowly than countries that devote only a seventh of GDP to social transfers?

He answers:

The keys to the free lunch puzzle are:

(1) For a given share of social budgets in Gross Domestic Product, the high-budget welfare states choose a mix of taxes that is more pro-growth than the mix chosen in the United States and other relatively private-market OECD countries.

(2) On the recipient side, as opposed to the tax side, welfare states have adopted several devices for minimizing young adults’ incentives to avoid work and training.

(3) Government subsidies to early retirement bring only a tiny reduction in GDP, partly because the more expensive early retirement systems are designed to take the least productive employees out of work, thereby raising labor productivity.

(4) Similarly, the larger unemployment compensation programs have little effect on GDP. They lower employment, but they raise the average productivity of those remaining at work.

(5) Social spending often has a positive effect on GDP, even after weighing the effects of the taxes that financed the spending. Not only public education spending, but even many social transfer programs raise GDP per person.

(6) The design of these five keys suggests an underlying logic to the pro-growth side of the welfare state. The higher the social budget as a share of GDP, the higher and more visible is the cost of a bad choice. In democracies where any incumbent can be voted out of office, the welfare states seem to pay closer attention to the productivity consequences of program design. In the process, those countries whose political tastes have led to high social budgets have drifted toward a system that delivers its tax bills to the less elastic factors of production.

The takeaway is that it depends on how you structure the taxes and what you spend the money on. To take an extreme example, if you taxed carbon dioxide emissions and spent the money on education you’d have every reason to expect growth to increase as a result. If you taxed land and spent the money on R&D, once again you’d absolutely expect growth to increase. These are not examples from the paper, but they illustrate the point. Lindert argues that actual welfare states often tax and spend in ways that are pro-growth or at least not terribly anti-growth. As he writes:

The overriding fact about the cases of costly welfare states, then, is that they never happened

Disney, Fox, Netflix, and Market Power

What are the best sources for economic analysis?

What publications have the best economics coverage? I’ve been thinking about this related to a side project, but it’s also relevant in light of the debate over “fake news” and journalistic quality, and as more and more publications go behind paywalls and thereby force consumers to make choices. Which sites are most worth paying attention to?

I have opinions, of course, as I cover economics for HBR. But I was curious to see which publications and sources dominate the elite economics conversation. To do that, I decided to see which sites are most commonly recommended by two major economics bloggers with somewhat different ideological positions: Tyler Cowen and Mark Thoma.

I used the Bing search API to get links to posts in which those two recommend things to read (which they’ve both done daily for over a decade), then I extracted the links from their posts, then I counted up the most common domains. (My code is here. If you notice any errors please leave me a comment on Github! This was a quick weekend project.)

There are a ton of caveats to this approach. It’s not a complete sample; it’s based on whatever links Bing does or does not return. And I don’t try to account for the fact that not every link points to something about economics; Cowen in particular often links to stuff about literature, food, etc. Finally, this is just an indication of what two particular economists found worth recommending; it’s not a comprehensive account of the field or an objective measure of what’s “good”. (If you know of others who’ve recommended links on their blogs in similar fashion, my code could be revised to include them. I’d love to diversify my sample.) Finally, by looking back ten years, my analysis biased toward sites that have been around that whole time as opposed to newer outlets like Quartz, Vox, or Fivethirtyeight. Despite all of this, I hope others find this analysis to be useful.

An observation before I get to some of the top sites: Cowen’s list of most-recommended domains in my sample is far newsier, whereas Thoma’s has far more blogs by individual economists.

With that in mind, here are the domains that show up in the top 50 most linked for both Cowen and Thoma in my sample, not counting platforms like Twitter or YouTube (and consolidating across sub-domains, though my code does not):

The New York Times
The Washington Post
Bloomberg
The Economist
The New Yorker
The Wall Street Journal
NBER
The Financial Times

That list is somewhat biased toward larger news organizations that publish more. Here are the additional sites that make the top 30 domain lists for both blogs, excluding domains ending in dot com:

The Library of Economics and Liberty
The Guardian (its URL ends in .co.uk)
Crooked Timber
Der Spiegel
VoxEU
Brookings
Project Syndicate
Eureka Alert
Digitopoly
The Center for Equitable Growth
The Federal Reserve

Here are sites that didn’t make either of the overlap lists above, but did make one of the two bloggers’ top 10 most frequently recommended:

Cowen:

BBC
The Atlantic

Thoma:

Brad DeLong
Conversable Economist
Econbrowser
Worthwhile Canadian Initiative

Finally, I checked the most common links within my sample just from recommendations this year (2017), and looked at the overlapping domains. Nothing surfaced that wasn’t already on one of these lists.

You could set the cutoffs wherever you prefer (again, here’s the code), and I can’t emphasize enough that lots of caveats apply. But if you’re looking for a places to go for good economic analysis, these lists aren’t a bad start.

Skills, productivity, inequality

I was recently asked, in an interview, for the single most important thing we could do to increase productivity growth. After a pause, I answered: upgrading Americans’ skills. Within minutes of finishing the interview I was regretting the answer — not because it’s wrong, exactly, but because, as I said to the interviewer afterwards, skills are overrated by the business elite as a cause of inequality, wage stagnation, etc.

As Dean Baker writes in Democracy:

It is a standard practice in policy circles to claim that technology is the primary culprit in the rise in inequality over the last four decades. As the story goes, computers and other new technologies have placed a premium on highly skilled labor while substantially reducing the need for the physical labor done by less-educated workers. This raises the pay of the highly skilled while lowering the pay of everyone else.

By making technology the culprit, this story relieves policy of responsibility for inequality. It also effectively makes the alternative to rising inequality suppressing technology, which presumably few would want to do.

In fact, in a closed door event just a couple days before that interview, I made the point that skills alone do not dictate labor market outcomes. An obvious point, perhaps, but again one that many “elites” discount.

If asked again, I’d say that to improve productivity growth we ought to invest more in science, technology, and people. That makes the point about the importance of human capital, but spreads the focus around a bit.

Again, the problem with chalking inequality or sluggish productivity or wage stagnation up to lack of skills or a “skills gap” isn’t that it’s wrong, but that it’s only part of the picture. As I’ve written, supply and demand do explain lots of what happens in the labor market; they’re just far from the whole story. Similarly, technology and the supply and demand for skills do substantially explain the rise of income inequality; they’re just not the whole story. (See also here and here.)

So, my answer wasn’t terrible. If you waved a magic wand and increased by an order of magnitude the number of people with basic digital skills — or who can create software, or who can build machine learning systems — you absolutely would increase productivity growth. It may or may not rank as the most important factor. The one thing we know for sure, though, is that it’s not the entire story.

On regulation, in aggregate

In May I wrote about libertarian Will Wilkinson’s defense of the welfare state. I wrote:

Part of Wilkinson’s point, though, is to distinguish between the redistributive state and the regulatory state. It’s the latter, he argues, that more frequently impedes innovation.

My view is somewhat less pessimistic, and my bottom line in 2015 was:

Even the assumption that bureaucratic “red tape” holds back startups is less obvious than it sounds… What evidence we do have squarely challenges the intuition that it’s government that holds back startups.

But if Wilkinson is going to acknowledge the entrepreneurial benefits of the welfare state, liberals ought to at least consider the possibility that regulations do hamper innovation.

Putting entrepreneurship and innovation aside for a second, it seems clear that the net benefits of regulation vary considerably depending on which ones you’re talking about. The Clean Air Act seems to have had large positive effects. On the other hand, overzealous land use regulations that prohibit building have had large negative effects.

The same is likely true of regulation and entrepreneurship. Plenty of regulations probably aren’t a big impediment; some even help. But plenty of others probably do hold back innovation.

Generalizing about the economic effects of regulation was hard, it seemed to me, since there are cases of regulation that are obviously net positive and cases that are arguably net negative. Now, that’s true of other government interventions, too; there’s better and worse welfare state programs, for instance. Nonetheless, the aggregate evidence that the welfare state and redistribution have been net positive seems reasonably compelling.

But Wilkinson’s Niskaten colleague Ed Dolan has a nice post in which he does some rough-and-ready statistical analysis exploring the relationship between regulation indices and measures of prosperity and well-being. In the absence of clear aggregate evidence on the effects of regulation (that I know of) it is quite interesting:

When all is said and done, our search among the economic freedom data from Heritage and Fraser for evidence of the effects of the regulatory state has been frustrating. We are left with the following conclusions:

  1. Simple correlations do find positive and statistically significant relationships between measures of regulation and commonly used measures of prosperity and personal freedom.

  2. Half or more of the relationships implied by simple correlations turn out to come from the strong correlations of regulation, prosperity, and personal freedom indicators with GDP per capita. Controlling for income, wealthy countries with light regulation have only slightly better freedom and prosperity outcomes than wealthy countries with average regulation.

  3. In multiple regressions that account for the interaction of regulation with other components of economic freedom, the statistical power of the Fraser and Heritage regulation indicators to explain cross-country variations in prosperity and personal freedom evaporates altogether.

  4. Close examination reveals serious methodological problems in the way both the Fraser and Heritage regulation components are constructed. Neither makes adequate efforts to distinguish between helpful and harmful aspects of regulation. Both include some indicators that fit poorly with common notions of what the regulatory state really is and does, and both exclude important aspects of regulation (especially of international trade).

Dolan, who does worry about the negative effects of at least some regulation, sees this largely as exposing the flaws of the most common regulatory indices. And it reiterates my almost tautological starting point: there’s good regulation and bad. But it also suggests that, broadly, regulation is not on average and in general a huge factor holding back our economies.

How to think about organizations

This post is the first part of a series in which I’ll attempt to sketch out some thinking that I’ve found useful in terms of understanding organizations. A lot of my work as an editor and writer focuses on how organizations work, and here I’m hoping to synthesize ideas I’ve found valuable, and present them as I think about them myself. I’ll try to cite my main influences in each post, but I’m borrowing from a wide range of sources and will inevitably fail to credit each and every influence.

This post is about how to think about organizations at the highest level. The next will be about how organizations are, well, organized. And the last one will be about what makes them successful.

What is an organization?

Here’s a definition by Richard Scott, a sociologist at Stanford:

“Organizations are groups whose members coordinate their behavior in order to accomplish shared goals or to put out a product.”

Three ways to think about organizations

Scott has a different way of breaking up theories of organizations, which I’ve included at the bottom. What follows is my own thinking on simple models for analyzing organizations:

The market view

Firms respond to incentives in the market. The emphasis here is on external conditions and financial pressures; firms come into being to capture market opportunities, and change strategy to maximize profits. The individuals in the firm are less important than the incentives the firm faces and perhaps the structure of the market. Per Ronald Coase, the boundaries of the firm are shaped by transaction costs. Managers exist to serve the interests of shareholders, which by and large means maximizing financial returns.

The managerial view

Organizations pursue specific goals, as directed by management. Power is formalized, and the perspectives and priorities of leadership matter in terms of how the organization will act. Conflicts and differing incentives can exist between members of the leadership team, leading to rival factions and internal politics, but it’s still the top management that matters most in shaping how the organization behaves.

The sociological view

The actions of an organization are deeply shaped by its culture, and by the preferences, incentives, and coalitions not just of management but of all the organization’s participants. Culture often influences organizational structure, rather than just the other way around. And management’s decision-making is shaped and constrained by the rest of the organization.

Using the three models

In the market model, standard microeconomic thinking helps explain an organization’s behavior and predict its actions. In the simplest econ 101 view, the organization (a private sector firm, typically) enters and exits markets in response to opportunities. In more complicated analyses, game theory helps explain how the rational actor (org) competes against other rational actors.

In the managerial view, the statements by management help explain and predict what an organization will do. If the founder of a company cares deeply about a project, it will go forward. If the board decides that a technology is the future of an industry, expect investment. Organizations that are “well run” — managed by competent people — succeed, and those run by incompetent managers fail.

In the sociological view it’s most important to understand the organizational culture and the internal politics. What do employees think the organization’s purpose is? Are they excited about a new market? Who in the organization stands to benefit if it adopts a new technology, and who might stand in its way?

These models may be biased toward understanding standard for-profit firms, but I’d argue they’re also useful lenses for thinking about other types of organizations, from nonprofits to nontraditional organizations like open source collaborations.

Further resources and influences

More on that definition of organizations by Richard Scott, a sociologist at Stanford, via his colleague Daniel McFarland who teaches a course on Coursera about organizations:

defining organizations

Here’s Richard Scott’s mapping of organizational theories, also via McFarland’s course. You’ll see a lot of the same issues are raised, but my thinking does not map clearly onto his. My managerial view is a combination of his rational and natural theories; my sociological view is a mix of his natural and open theories; and he doesn’t really have a corollary to the market view, though aspects of both rational and open overlap with it.

organizational theories

Another good set of theories about organizations comes from Graham Allison’s seminal book on the Cuban Missile Crisis, The Essence of Decision. Here’s the Wikipedia entry, which gives an overview of his three theories of organizational decision-making.

If you’re new to economics and want an introduction to what I called the market view above, check out Marginal Revolution University’s introductory video on competitive firms. More videos here.

And, of course, working at HBR plenty of what we’ve published has influenced my thinking on all of the above. I’ll draw on some of that more directly in future posts.