The rise in inequality and "tiger mom" parenting

The spirit of Gary Becker can be felt in this piece by Matthias Doepke and Fabrizio Zillibotti. It's good fun to read. The central proposition is contained in this passage:

A seemingly universal area of disagreement between parents and children is the trade-off between working hard for school and for one’s career versus having fun with friends and other immediate enjoyments. Few parents wish that their kids blew off homework more often in exchange for some instant pleasure. This conflict can be interpreted as a difference in time preference – parents worry more about the long-term consequences of children’s behaviour (such as studying for school) than do the kids themselves. Hence, many parents push their children towards harder work, either through coercion (such as ‘grounding’ children, i.e., not allowing them to spend time with friends) or through sustained indoctrination with a strong work ethic and a striving for success.

The return to pushing children hard consists of the increased likelihood that they will do well later in life. How important this is to parents depends crucially on the degree of economic inequality, and in particular on the return to education. In an economy where education and effort are highly rewarded and where people with little education struggle, parents will be highly motivated to push their children hard.

Thus, we expect economic inequality to be associated with intensive (authoritarian and authoritative) parenting styles.

In contrast, in an economy where there is little inequality and artists and school dropouts earn only slightly less than doctors and engineers, parents can afford a more relaxed attitude, and permissive parenting should be more prevalent.

Now, the assertion that higher inequality implies higher returns to education is a bit vague. In fact, in some Western societies there seems to be a tendency to acquire too much formal education, where a collective move towards more learning on the job could be beneficial. But if we define education as a general set of skills that makes you fit for the working world, then the story makes a lot of sense. Times are getting tougher in developed countries, and so should parenting.

The joy of creating

Over at "Sketch Me If You Can", former LSE student Lee Zhi Wei has a great story about the joy of creating instead of following the crowd. He draws, other people write papers.

See the whole thing here.

Why Germans are not ignorant

As GDP growth in Europe has turned sour again, the opponents of austerity are getting more worried, more vocal and more angry. It's understandable. I agree with them insofar as lack of demand is probably contributing a lot to European stagnation. If there was a way to swiftly implement structural reforms in Europe and at the same time give it a sizeable fiscal stimulus, I would be in for it.

I just have doubts whether some in the anti-austerity camp are able to imagine that the German government could ever think beyond economics. For Simon Wren-Lewis, failure to implement fiscal stimulus can only be the result of either "ignorance or greed". Paul Krugman happily echoes the remarks by diagnosing a "refusal to think clearly".

A moment's pause should be enough to see that Wolfgang Schäuble or Angela Merkel are neither very ignorant nor very greedy personalities. Most politicians and businesspeople, inside and outside of Germany, outperform them on both accounts. And so the diagnosis cannot be right. It does not advance the debate about solving Europe's problems, instead catering to an audience who has already made up its mind about the issue.

Economists in general have a tendency to ignore things outside of economic theory. Instead, upon seeing some behaviour not consistent with their favourite theory, they declare people stupid. It's okay to argue something does not make economic sense. But please make an effort first to see whether it does from another angle. Does the German government believe in the "confidence fairy", in expansionary austerity? My bet is that it is well aware of the thin evidence. Is Schäuble deeply satisfied to see Italians miserable? Give me a break. The game being played is different. It is called "Reformdruck".

"Reformdruck" (pressure to reform) is a concept I don't think exists in macroeconomic theory. It has a moral hazard flavour to it, but it is really not about that. The first premise is that many European countries badly need reforms to their political and economic system. This includes the much discussed flexibility in the labour market, but also raising retirement ages, cutting taxes and red tape for businesses, and enforcing tax collection while reducing the size of the shadow economy. The second premise is that reforms only happen when the situation is dire. Political systems are inertial and reforms happen only in bad times. All reforms carry costs and those tend to be avoided until even the most ardent defender of the status quo gives up his vested interests for the greater good. The conclusion is that for Europe to prosper, some countries will have to suffer economically. Only then can the national governments in Rome, Paris, Madrid and elsewhere implement the changes that lead Europe out of the valley.

This is well illustrated with the story "Mr Keuner and the flood tide" by poet Bertold Brecht:

Mr Keuner was walking through a valley when he suddenly noticed that his feet were walking through water. Then he realised that his valley was in reality an arm of the sea and that high tide was approaching. He immediately stood still in order to look around for a boat, and he remained standing as long as he hoped to see a boat. But when no boat came in sight, he abandoned this hope and hoped that the water would stop rising. Only when the water reached his chin did he abandon even this hope and begin to swim. He had realised that he himself was a boat.

In essence, Mrs Merkel does not want to send a boat to Italy because she hopes Italy will eventually begin to swim. Note how this is not a moral hazard story. Mr Keuner is not pretending to be helpless, being simply too lazy to swim. He is just being human, not mustering the courage to change his behaviour until it becomes inevitable to do so. In Merkel's view then, I think, Italians are not simply shirking and burning German money. But they will only be able to turn their country around when the economic situation is uncomfortable.

This argument is hard to grasp with macroeconomic theory. In our models, labour-market laws and all the structural issues of the economy are one thing, and deficiency of aggregate demand is another. To a New-Keynesian model, structural deficiencies in an economy are typically exogenous and in any case taken care of by the HP-filter. By contrast, a cyclical demand deficiency can and should be adressed by monetary or, at the zero lower bound, fiscal policy. No surprise then that, for the economist living in such a world, anyone demanding structural reforms without sustaining aggregate demand must be "ignorant".

There is, however, one real danger in the pursuit of the German policy stance. Mr Keuner did not see a boat. But what if he had seen his friend on a boat, only to be turned down by him? Germany is a large boat visible to everyone in the valley of the Eurozone. Imposing "Reformdruck" is already harming the friendship with its neighbours. The long term political cost of this might be greater than what most Germans on their comfortable boat imagine.

Read your paper: this is your soul

My work is not a cold product. It is not an objective account of the research that it tries to explain. It is a window into my soul. It is the product of my care and nurture, much like a child.

It makes me a bit sad to discover this insight so close to the job market. It would have made me a better job market candidate.  Now I feel like a parent who has neglected his child for several years: the damage is not irreversible, but opportunities have been missed. I still hope that I can become a better economist and a better "parent" to my work.

Think about it. Does the economist write with great confidence about the importance of her work, or humbly suggest to point attention to an overlooked area of the field? It reveals the type of role he seeks to fulfil in life. Does he write a paper about the existence of equilibrium,  or about what an experiment in Kenya teaches us about incentives? It indicates the type of problems occupying his mind. Does he label his paragraphs "Introduction" and "The model" or "Why this matters" and "What explains return predictability"? It shows how much he cares about sticking to rules and conventions. Finally, how much effort has he put into the paper? It lays bare his life priorities.

The "content" of the paper is of course the research project it describes, and this itself reveals much about the personality of the researcher. But the writing itself reveals just as much. Are you arrogant? are you timid? Do you believe in what you write? Do you feel what you do is important? It will show in the way you write.

It took a small little book for me to realise that I have written papers not to express my ideas in the best possible way, but to conform to a scheme. My writing style was guided mostly by the desire to be accepted in the research community. But that is not a very good principal motivation. It transforms the act of writing into a kind of nuisance that is necessary to be published, but somehow separate from the "actual work". That is misguided. A better motivation is to be truthful to the ideas that drive you. This motivation will also make other people listen.

We sometimes live in the illusion that our work could somehow be separate from our private life. It is not; our personality and, yes, our soul connect the two. Writing it down is part of a larger quest that shapes our lives. It is the quest of becoming truthful to ourselves.

If you were waiting for a sign

Good and old advice to young economists

Almost every econ PhD student knows the following two articles, but one more hyperlink in the vast ocean of the internet cannot harm. These are pieces of advice to young economists that come from two academics that are probably at rather opposite ends of the spectrum, both in terms of political views and in terms of writing style. Classic read.


John Cochrane: "Writing Tips for Ph. D. Students"
Paul Krugman: "How I Work."

Bill Evans - Here's That Rainy Day

Evans' richly stacked chords are just great.