The Illusion of the Pay Gap

The first homework of the semester informs my students that one of the reasons men get paid more than women is because women can get pregnant. Because contracts promising to not get pregnant are illegal, hiring women is riskier for employers. An employee could take several months leave with relatively little warning. What a coincidence that President Obama's first bill addresses the same issue, but ignores the explanation.

Insisting that employers pay women less for malevolent reasons, Mr. Obama made it easier to make pay discrimination suits. Notes CNN,

companies will need to meticulously document pay decisions and retain detailed employment records, legal experts say. In this, small companies may be at a disadvantage - few have access to the attorneys and human-resources professionals that will help larger businesses comply with the newly expanded law.

A strange thing to do in rough economic times.

Risk of pregnancy isn't the only reasons for pay gap. Women tend to enter less technical jobs. Part of that is a natural tendency; for whatever reason, women are less likely to enter the sciences and, save economics, more likely to enter the social sciences. Go to any college math class and I bet you'll see mostly men (no going to an all-women school; that's cheating).

The other reason for the draw to the less technical is, you guessed it, pregnancy. Technical jobs have a high degree of obsolescence, meaning you have to stay on top of the latest developments to keep pace. But when you leave the job market for months at a time to care for a newborn, this is really hard to do. Hence women become secretaries, not engineers.

Biology's a sneaky thing and even seeps in after the children are born. Women also tend to work part-time, since women are still the gender that tends to take of kids. Being restricted to part-time adds additional restrictions to where they can work; again, these places that accept part-time employment tend to be paid less. Fringe benefits are usually off the table as well.

The nice thing about this story is it's easily testable. Simply look at groups where the biology issue isn't relevant and control for education. Thomas Sowell from Economic Facts and Fallacies:

Among college-educated, never-married individuals with no children who worked full-time and were from 40 to 64 years old--that is, beyond the child-bearing years--men averaged $40,000 a year in income, while women averaged $47,000. (p70)

Women are paid 17.5% more than men! Maybe we'll see that new legislation end the tyranny of male bosses upon his fellow man.

The Law of One Strange Price

Tyler Cowen at Marginal Revolution is rightly skeptical of macroeconomic explanation that rely on one strange price, including interest rates, tax rates, and the price of T-bills compared to cash. But it's only partly true. Yes, one screwy price is unlikely to mess with the whole economy (even for systematic prices such as interest rates and taxes). But it can if it's screwy enough. If the minimum wage was $100 an hour, there would be a major macroeconomic downturn thanks to that law alone.

The question becomes what is likely to be so out of whack. Interest rates and T-bills are traded on the market, checked and rechecked every day. If there is a systematic error, it's either short lived or relatively small. Taxes are checked as well (by voters), but that happens only every couple of years, if at all. They're also checked in a political process where the "right" tax is determined and spent by lawmakers acting on the voters behalf, instead the voters themselves. Most prices aren't so strange to mess up an economy by themselves. But if one is, I bet it's a tax.

Life Follows Death

During his inaugural address, President Obama rightly reminded us that it is the risk takers that ensure a better tomorrow. Yet he paradoxically argued that the current economic slowdown is the fault of greed and the market needs a "watchful eye." One cannot have both. Risk takers have to fail; otherwise it would not be risk. Pointing to mistakes as evidence of too much risk, of a need to remove bad decisions, necessarily curtails the capacity to make the right ones. We cannot have growth without bankruptcy nor more than we can have evolution without extinction.

The Smell of the Marble

Millions are gathering in the National Mall this morning to bear witness to the swearing in of Barack Obama. There's anticipation in the air that Mr. Obama is something unique and new. A different kind of politician.

He's certainly different (Joe Scarborough mentioned this morning that Obama is less prone to the sin of pride, which undos so many politicians). But the incentives of office haven't changed. Norris Cotton, a New Hampshire senator from the fifties to the seventies, warned colleagues of smelling of the marble, as in the white marble that covers DC. "And when you can smell it, you'll like it. And you'll be ruined for life." Great unchecked power leads to abuse and despite the Constitution's efforts, much of the power in Washington is unchecked.

This goes double for the presidency, whose role has expanded over the centuries but is now joined with a sympathetic congress. It's entirely possible that Mr. Obama, bending to expectations that he's a different kind of politician, will rise above such abuses. But the hero worship is strong and the people euphoric. Unless we become much more scrutinizing, he'll smell the marble.

Traffic Patterns and the Left Lane

Frustrated in DC traffic, a friend of mine wondered why, in the States, people drive in the city about as much in the left lane as in the right while in Europe, the left lane is traditionally held exclusively for people going very fast and passing. This is an excellent question and I think I have the solution.

Americans have low car taxes, free parking, few tolls, and relatively cheap gas. Not surprisingly, we have more cars compared to our European counterparts and traffic is thus much worse. With crowded streets, drivers learn it's far better to drive in the left lane if they're planning to turn left, even if the turn isn't for miles. No one wants to miss a turn because they never could claim a spot in the correct lane. Thus people drive in one lane as easily as they drive in the other.

The same can be said of interstate traffic, though the story's slightly different. With so many cars on the road, there's greater likelihood that the right lane will have an unusually slow driver. Constantly passing in and out of the right lane to avoid these drivers might induce the faster car to simply stick with the left lane, even though an even faster car will likely be stuck behind it soon. Thus we see very fast cars weaving through traffic, blazing a sort of third lane.

The Illusion of Irrationality: Free Is Fun

A friend loaned me his copy of Predictably Irrational, by Dan Ariely. Ariely's a behavior economist, exploring all the ways people don't react in quite the same ways theory predicts. It's a fascinating area of research, a blending of economics and psychology. The book itself is well written and the content makes you think. But it goes way too far.

Because people don't act as theory predicts, Ariely proclaims they are irrational. In reality, the theory doesn't capture all the elements in play (or Ariely's not acknowledging they do). For example, Ariely dedicates chapter three to how people will get something just because it's free, even if it's not the better deal. They'll choose the free $10 gift certificate over a $20 gift certificate which costs seven dollar (effectively choosing $10 over $13). But people like getting things for free. Even if it's not really free, even if we know it's not really free.

Ironically, Ariely said it best: "FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is." (p54) If it gives us that emotional charge, it really is more valuable. People also gamble though few will think they actually come out ahead. The joy comes from those few times you win. That joy, that emotional charge of getting something for nothing, is valuable to people and they'll gladly pay for it in the form of a lost opportunity.

My theory is easily testable (though expensive). Start by offering the $10 gift certificate versus $20 certificate for $7. Then increase that value from $20 to $30 then $40 then $50, steadily increasing the (opportunity) cost of the indulgent from $3 to $13 to $23 to $33. I'll bet you'll see more people start grabbing for their wallets, rationally determining that the joy of FREE! isn't worth the cost.

Comma Marries And

Writing out lists in writing is rather straight forward, but a simple mistake makes the list confusing. One of the easiest ways to keep it clear is to be consistent with commas. Consider the following sentence:

My favorite types of yogurt are orange creme, pineapple, strawberry and banana and vanilla.

Are there three flavors? Four? Two? Is strawberry and banana one flavor or is banana and vanilla one flavor? It's not clear. It's also awkward because the reader doesn't know when to finish the sentence. Now consider the same sentence with one more comma.

My favorite types of yogurt are orange creme, pineapple, strawberry and banana, and vanilla.

Much clearer, isn't it? A friend of mine once told me that commas separate each idea in a sentence as if they were the gaps between cars of a train. It's a pause to signal a slight change in thought. Don't treat it like a period (i.e. watch sentence length) but use it right in a list.

Questionable Writing

It's natural for people to ask questions in their writing, likely because those very questions are running through the writer's mind as they type. I saw this style many times while grading rough drafts my students submitted last week. It's not inherently bad writing. But like quoting, it should be used sparingly with two rules in mind.

1. If you're going to ask a question, ask only one and then immediately answer it. If it has a long answer (i.e. it introduces a section), then answer it in a way that summarizes the section. Asking a whole bunch of questions at once confuses the reader and wastes her time. It also robs you of authority; the reader might ask "Why is he asking so many questions? Does he not know the answer?"

2. You can also ask several questions to illustrate the extent of the difference of alternatives, alternating between one side and the other. Make sure you summarize at the end, of course. Virigina Postrel does this very well in her book The Future and Its Enemies:

How we feel about the evolving future tells us who we are as individuals and as a civilization: Do we search for stasis--a regulated, engineered world? Or do we embrace dynamism--a world of constant creation, discovery, and competition? Do we value stability and control, or evolution and learning? Do we declare with Appelo that "we're scared of the future" and join Adams in decrying technology as "a killing thing"? Or do we see technology as an expression of human creativity and the future as inviting? Do we think that progress requires a central blueprint, or do we see it as a decentralized, evolutionary process? Do we consider mistakes permanent disasters, or the correctable by-products of experimentation? Do we crave predictability, or relish surprise? These two poles, stasis and dynamism, increasingly define our political, intellectual, and cultural landscape. The central question of our time is what to do about the future. And that question creates a deep divide. (p xiv) [Original Emphasis]

Newsflash: Big Plans Are Complicated

Commerce Secretary Carlos Gutierrez commented on CNBC today arguing if the government loan goes though, the government will only manage the big involving their balance sheet. He insists politicians are capable of doing this well.

What we're talking about here is not the running of the auto company. We're saying someone who can evaluate whether they are making the tough calls and whether they are restructuring and whether the numbers suggest they are making the tough calls...We're talking about a big picture of what needs to be done to restructure these companies based on what the executives will bring forward.

This is a lot like saying "I'm not going to tell you how to drive because I'm not an expert. But I will tell you how to make your Civic do tricks out of a James Bond movie." These big picture changes are immensely complicated, filled with nuanced information no one in Congress or the Commerce Department has. They are precisely the things outsiders should not micromanage.

Quote With Caution: Leading and Following

With my development students feverishly working on their final drafts, I want to take some time passing on some writing advice. Today we discuss quoting.

While I've mentioned it before, it's worth repeating. There's only two reasons to quote: (a) convincing the reader that someone believes something (usually something the quoted may not freely admit) and (b) repeating an idea illustrated so well, you can't possibly say it better.

But knowing when to quote is not the same as knowing how to quote. I've witnessed many papers where the writer will quote without comment. Their lead in will be bland and their follow up will be nonexistent. I read phrases such as "Paul Collier says," "Jared Diamond writes," "William Easterly argues," with barely a hint of what they are going to say.

Instead, try something more tailored. Paraphrase the author's idea in the context of the subject of the paper. Then, indicate to the reader why you are bothering to quote. (i.e. "Friedman said it best: 'If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.'")

Other times, the writer will quote and simply move on. If you going to bother quoting, add context to the quotation. Comment on it (but don't repeat yourself from the lead in). Reference an idea or phrase from within the quote and connect it back to your paper. Quotes are supposed to complement your writing, not replace it.

Don't Celebrate Yet

A surprising 61% of Americans oppose the Detroit bailout of the big three (Ford, GM, and Chrysler). This is hard to explain, given the populace's distaste for seeing big employers go under.

I wish I could say the results are due to people understanding growth doesn't come from preserving failures. Or a realization that there are some things Americans shouldn't do. But while the big picture's the same, the reasoning's likely much more nuanced. Quick depreciation of American cars, declining sales in SUVs, and the rise of the foreign-made hybrid are everyday examples of a poorly performing sector of the economy. Now if only people would take the essence of the argument and apply it consistently.

Paradoxically, the results are also low. Despite the repeated failures of the auto industry, despite the everyday logic that if something doesn't perform you shouldn't work to preserve it, despite the fundamental reality that letting something go away allows us to do something else, nearly forty percent of Americans are not against a bailout.

And then things make sense again.

The Forgotten Charity

Amity Shlaes recalls the last great act of banker, industrialist, and art collector Andrew Mellon in The Forgotten Man:

By giving largely, generously, completely, and entirely, he would demonstrate that the private man could be as good a servant to the public as the government official was...Mellon's gift would show the value of leaving art--or capital--to accumulate and compound in the shadows, untaxed. The National Gallery would be an object lesson that the high taxers could not forget.

One of the finest collections of Western art in the world, and the main building which houses it, was originally the gift of a "robber baron" who gave so selfishly that it doesn't even bear his name. And so, alongside the monuments to presidents and memorials to wars, among the lawmakers and tourists, in the shadow of the Capitol building, rests a silent dedication to low taxes.

The Siren's Song of Manufacturing

Today on Morning Joe Pat Buchanan mourned the decline of the manufacturing sector, whose members now (supposedly) work at Wal-Mart. Forget that over the past thirty years median individual income rose about 40%. Even if they were becoming nurses and lawyers (and they are), Buchanan still prefers manufacturing cars, toys, and electronics in America, by American firms.

Manufacturing is no more important than farming, customer support, or mining. The key is never one sector. The key to American prosperity (among other things) is trade. Freer trade opens the plethora of human ingenuity to more people at steadily decreasing amounts of effort. Alaskans get bananas year round. Nevadans get free tech support. Indianans get toys under the tree. Just because we can't point to a single area where everyone works doesn't mean they can't find good jobs, obtain consumer goods, or live a fuller life. Freer trade means all these things are more common, not less.

Burn, Baby, Burn

With the world financial system still in turmoil (and Japan joining the recession ranks), governments hear the public cry for action. It's a knee-jerk call with little forethought. People mistaken the current economy as a burning building: clearly, something has to be done. This analogy makes a series of errors, assuming the government could fix the problem, knows how to fix the problem, and wants to fix the problem in a way that actually works (instead of just claiming it works).

If you insist on the analogy, we should wonder if the fire's too hot to suffocate. We should wonder if the buckets contain water or kerosene. We should wonder if the firefighters wish to get burned putting it out or stay away and roast marshmallows. But most of all, we should wonder if if the building should just burn down.

The financial sector is really large. Arguably too large. At the very least, many firms made some big errors. Saving the company that's a proven failure is not a recipe for long term growth. Ditto for Detroit, who focused on SUVs while gas prices climbed. The same goes for virtually any struggling industry, especially its old and unimaginative players. They made a mistake, honest or not, and now they're dead weight.

Forest fires occur naturally. As forests age, dry undergrowth covers the ground and old trees block out all light. Nothing new grows. It takes only a bolt of lightning to ignite the old structure and wipe it away in a cruel immolation. This is the only way new life can flourish and the forest can ultimately survive.

Let the ancients burn.

Slipperly Logic

After noting the fall of oil prices, a friend of mine suggests oil companies could have "gotten away" with higher prices longer. When prices rise, it's a conspiracy in the greedy pursuit of profits. When they fall, it's still a greedy pursuit of profits?

Supposedly, prices fall because colluding firms want to assuage calls for regulation and taxes. Anyone even remotely familiar with commercials, advertising low prices, knows how sloppy that argument is. There's no evidence of sustained collusion, because there's no way to enforce such deals. Prices rose due to sudden demand and are falling because this competitive industry is finally catching up.

This is not a new story. From Amity Shlaes' The Forgotten Man. In 1934,

[Harold Ickes] had discovered that at numerous points oil was being extracted clandestinely and illegally, outside his NIRA [National Industrial Recovery Act] production quotas, and sold at prices that undercut the policy to force prices upward. He was outraged and opened a campaign against the oil bootleggers, describing them as possessed of a "sly animal cunning." (p 203)

No wonder oil CEOs are paid so much. It's not fun being the villain no matter what you do.

Google > CDC

The U.S. Centers for Disease Control and Prevention (CDC) publishes flu data, but with a lag to allow for the data to arrive. Google decided to track the searches for flu, and gets numbers similar to the CDC, but only without the lag. Thus if you want to know the current flu situation, you are better off with Google than the CDC.

No, You Can't

Lawmakers from all fifty states are being bombarded with requests for tickets to Obama's inauguration. When the norm is several hundred tickets each, some report several thousand requests. Questions arise as to how to divvy them up. Lottery systems seems most likely. A market does not.

Legislation looms to make scalping these tickets illegal. It seems like we should ensure that everyone should have an equal chance to get them, that we should combat those who would order a dozen, only to sell them for personal profit. But an a world of different preferences, a forced lottery system is more unjust than scalping tickets. The person who's mildly interested has the same chance as the die-hard fan. Without a market, there's no way to correct the randomization if the former wins. (Frankly, I'm surprised they aren't going by first come, first serve basis. That would solve a lot of problems. But part of the issue is the offices don't know how many tickets they are getting.)

Auctioning the tickets is not perfect, either. The curious but wealthy are preferred over the enthusiastic but poor. Without a prohibitively costly interview system, it's not possible to make it perfect. But denying trade makes it strictly worse.

Tyranny of the Electoral System

Missouri's still counting and recounting but the absurdity of our electoral system is still clear. Ignoring the Show Me State, here are the results:

Candidate	% of Popular Vote	% of Electoral Votes
Obama	52.6%	69.3%
McCain	46.1%	30.7%

The spread between Obama and McCain jumps from 6.5 points to almost six times that amount (38.6). A large part of this discrepancy is because the plurality of the state gets all the state's votes. But it brings to bear another strange aspect of the electoral college: Pennsylvania has 25 times as many people as Wyoming, but only 7 times the electoral votes. Iowa has a fourth of the people Illinois has but only a third of the votes. In other words, the system disproportionately favors low populations states. (This was a major issue in 2000, when Gore received the popular vote but lost the election.)

People argue rural areas have to get extra voice. Otherwise the candidates would never pay attention to them and spend all their time in major cities. So what? Majorities always have a greater say than minority opinions. But no one says that gays, immigrants, and Jews should get extra votes. The only difference is these minorities (mostly farmers) are concentrated geographically. I'm sympathetic to the idea of giving the outside opinion extra muscle in order to curb the tyranny of the majority. But it's not clear why that minority has to have their own state before they get such an ability. Because we lack consistency, part of the minority becomes party of the majority and the bullying continues.

We Stand Together, Like It or Not

My mother used to tell me "if you don't vote, you can't complain." When I was younger, I remember nodding in agreement. Now, as an avid nonvoter, I failure to understand her arguments. You could say I've "learned" less over the years if you consider such reasoning knowledge. But it's not.

The fallacy assumes defection is a practical option. If three people vote to go see a movie, and one of them offers no opinion, that person still chooses to see what the others decide. We all recognize if silent Carl goes to High School Musical 3 with his friends, he is in little position to complain about which movie to see. If he didn't want to see it, why did he go? The same could be said of those voters who went along with the decision. If they wanted to see Saw V, we would wonder why they followed the majority.

But our process isn't like seeing a movie. It's more like being trapped in a plane and people voting on the destination. If the choices are between Alaska and the Yukon, and the majority votes for Alaska, we can understand why the Yukoners complain. But we can also understand why those that like the tropics, and don't bother choosing between two bad choices, complain. We would only be surprised if the Alaskaners protested the result once we arrived.

It turns out those with the least credibility to complain are those that voted for the winner, which is usually most of the voters.

First Time Voting

Like Alex Tabarrok, I voted for the first time today. It took about 45 minutes, and my voting precinct is close enough that I jogged there after I woke up. I realize my vote counts for nothing but now when people talk about voting I know what they are talking about.