Demand for Schooling, Returns to Schooling, and the Role of Credentials

Monday, July 13th, 2015

Alex Eble and Feng Hu look at demand for schooling, returns to schooling, and the role of credentials:

Wages are positively correlated with years of schooling. This correlation is largely driven by two mechanisms: signaling and skill acquisition. We exploit a policy change in China to evaluate their relative importance. The policy, rolled out from 1980 to 2005, extended primary school by one year. Affected individuals must then complete more schooling to obtain their highest credential, the main signal of interest. If the primary mechanism behind schooling returns is signaling, we would expect little change in the distribution of credentials in the population, but a large increase in schooling. If skill acquisition dominates, we should see no change in length of schooling but a change in credentials. Our results are consistent with the signaling story. Further consistent with such a story, we estimate that the labor market return to another year of schooling is very small, though greater for the less-educated. We estimate that this policy, while redistributive, generates a likely net loss of at least tens of billions of dollars, reallocating nearly one trillion person-hours from the labor market to schooling with meager overall returns.

The Hoodrat Hatchery

Friday, July 10th, 2015

James LaFond offers his own colorful explanation for why yuppies are protesting the new Super Wal-Mart in the Baltimore suburbs:

[I]n light of the unwillingness of the Baltimore City government and police to lift a single finger to protect citizens from rampaging hoodrats and prowling gangbangers during our recent urban unpleasantness in Harm City, the suburban appetite to homestead in a hipster city enclave is suddenly on the wane just as the impetus to urban flight is on the rise among decent urban poor. Unfortunately these decent folks are the hosts for the social parasites that will ride them like ticks on a dear’s back out into Harford County. And the government has designed society so that the children of these decent fleeing urban folks will become that which they fled from!

First off, you must understand that this suburban blight drive is directed by the superrich who live in rural and urban enclaves. Suburbia is the slave quarters of the postmodern plantation, where most of the people that create wealth live. The liberal elite, and the criminal class that serve the superrich reside in the urban centers draining suburbia dry like a vampire coven hanging on the necks of a bovine herd.

You will notice In Baltimore, that the wealthy have enclaves and that vast stretches of vacant housing are left to ruin, to be snapped up later by developers, as the hoodrat hordes are lured out into suburbia along expanded bus lines, to virgin areas serviced by mega retailers which pay wages so low that the only people who will work there are the poor who want to get out of the urban drug war zone.

Of those 300 jobs provided by a super Wal-Mart one will be in the low six figures, and four will pay enough to permit that assistant manager to rent an apartment or go in together with a spouse in the purchase of a house. The other 295 employees will work at or below the poverty line under poor conditions with no benefits, and will require subsidized housing, home sharing, apartment crowding, food stamps, and, most ominously for you, public transportation which will permit youths to transport drugs and violence as low risk mules and insurgent pioneers into your area. As Wal-Mart gets the lion’s share of food stamp transfers [EBT cash and food] than this operation amounts to a 19th century Appalachian coal mine with its own company store, with over half of the employees spending most — or even more than — their salary at the Wal-Mart register, literally a captive market and labor force in one.

These employees will bring their families to the area. There will also be an influx of welfare families fleeing the city ahead of the drug gangs and predatory police along the bus lines set up at tax payer expense so that you can save 25 cents on a dozen eggs, which requires some schlep to stock them in that upright cooler on a wage that cannot support an automobile. These families — by law — may not have a father. Therefore, 15 years from that Wal-Mart going up, you will have a full generation of violent, rootless, fatherless youth grown up with no sense of community, responsibility, or decency, who will instead be infused with a sense of entitlement, righteous oppression, and slave class envy for you, the guy buying the house down the street as its value plummets.

Los Angeles with a Past

Thursday, July 9th, 2015

Michael Lewis describes the financial situation in Greece — writing five years ago:

Moody’s, the ratings agency, had just lowered Greece’s credit rating to the level that turned all Greek government bonds into junk — and so no longer eligible to be owned by many of the investors who currently owned them. The resulting dumping of Greek bonds onto the market was, in the short term, no big deal, because the International Monetary Fund and the European Central Bank had between them agreed to lend Greece — a nation of about 11 million people, or two million fewer than Greater Los Angeles — up to $145 billion. In the short term Greece had been removed from the free financial markets and become a ward of other states.

That was the good news. The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions. Add it all up and you got about $1.2 trillion, or more than a quarter-million dollars for every working Greek. Against $1.2 trillion in debts, a $145 billion bailout was clearly more of a gesture than a solution. And those were just the official numbers; the truth is surely worse. “Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. “The way they were keeping track of their finances — they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent. It wasn’t even what you would call an emerging economy. It was a Third World country.”

As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it. In just the past decade the wage bill of the Greek public sector has doubled, in real terms — and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.” The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average — and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other. It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed. People who go to public health clinics assume they will need to bribe doctors to actually take care of them. Government ministers who have spent their lives in public service emerge from office able to afford multi-million-dollar mansions and two or three country homes.

Oddly enough, the financiers in Greece remain more or less beyond reproach. They never ceased to be anything but sleepy old commercial bankers. Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government — where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.

I enjoyed this bit of local color:

Athens somehow manages to be bright white and grubby at the same time. The most beautiful freshly painted neoclassical homes are defaced with new graffiti. Ancient ruins are everywhere, of course, but seem to have little to do with anything else. It’s Los Angeles with a past.

Read the whole thing.

Closing Europe’s Harbors

Monday, July 6th, 2015

David Frum provides a rather thorough case for closing Europe’s harbors to migrants:

Illegal migration across the Mediterranean has tripled since the overthrow of Muammar Qaddafi in 2011 opened the ports of Libya to human smuggling on an unprecedented scale. Some 50,000 migrants made the crossing to southern Europe in the first four months of 2015. Another 1,800 died at sea.

Hundreds of thousands more people are estimated to be waiting in Libya for the chance to cross into Europe. Millions more would follow if they could. The migrants come from a vast swath of Africa and the Middle East, spanning not only war-torn Syria (in the first four months of 2015, Syrians accounted for just 30 percent of those crossing the sea) but also Nigeria and the Gambia and Eritrea and Somalia and Mali. They wish to leave behind poor, unstable countries in order to seek opportunity in the wealthy lands of the European Union. It’s a dangerous gamble. But the prize is huge.

Of the 170,000 migrants who made landfall in Italy in 2014 (Italy being the most common destination for migrant boats last year), reportedly only about 5,000 have actually been deported. Sixty percent of those who sought asylum in the country last year were granted refugee status or other protections upon their first request. (Still more received such status on appeal.) Many migrants don’t wait for a hearing. They spend a few days in an overcrowded reception center, then abscond north to the stronger job markets of France, Germany, and beyond. Italian authorities are sometimes accused of conniving at this escape, so as to lessen the burden these new arrivals pose to Italian taxpayers.

The migrants who embark upon this journey are typically represented as terrorized and impoverished—as people driven (to quote Amnesty International) “to risk their lives in treacherous sea crossings in a desperate attempt to reach safety in Europe.” The demographic and economic facts complicate that story. When populations flee war or famine, they generally flee together: the elderly and the infants, women as well as men. The current migrants, however, are overwhelmingly working-age males. All of them have paid a substantial price to make the trip: it can cost upwards of $2,000 to board a smuggler’s boat, to say nothing of hundreds or even thousands of dollars to travel from home to the embarkation point in the first place. Very few of the migrants from Libya are actually Libyan nationals.

Doug Saunders, a British Canadian journalist who has spent considerable time reporting from North Africa and the Middle East and who in 2012 published a book that was sympathetic to trans-Mediterranean migrants, rejects as “insidious” the notion that such migrants are fleeing famine and death. To the contrary, he wrote recently:

Every boat person I’ve met has been ambitious, urban, educated, and, if not middle-class (though a surprising number are …), then far from subsistence peasantry. They are very poor by European standards, but often comfortable by African and Middle Eastern ones.

What these migrants are doing is what migrants have always done: they’re pursuing a better life. But although migration is attractive to the migrants, it is unwanted by European electorates—and the tension between continued migration and public opinion is changing the Continent in dangerous ways.

Read the whole thing.

Children of Uneducated Parents Don’t Go to College

Monday, June 15th, 2015

Norwegians whose parents did not go to college are just as unlikely to go as Americans whose parents did not go to college — even though tuition’s basically free in Norway and far from free in the US:

And what happens is that — even though it’s essentially free — only 14 percent of children from the least-educated families in Norway go to college, compared to 58 percent of children from the most-educated families, according to an analysis by a Norwegian education researcher, Elisabeth Hovdhaugen.

That’s almost exactly the same proportion as in the United States, where the cost of college is borne largely by students and their families, and where the Organization for Economic Development and Cooperation reports that only 13 percent of children of parents without higher educations end up getting degrees themselves.

Inconceivable!

It’s a huge issue, considering that fully one-third of five- to 17-year-olds in the United States have parents who did not go to college, the College Board reports, at a time when policymakers are trying to increase the number of Americans with degrees. They’ll be needed to fill the 65 percent of jobs by 2020 that will require some sort of college or university training, according to the Georgetown University Center for Education in the Workforce.

The circularity here amuses me. Very, very few jobs require the skills taught in college. Many more require the kind of people who go to college. As more people go, more graduates are needed.

Some of these Norwegian “problems” are also amusing:

Also, because wages remain high for blue-collar occupations, she said, there’s less of a financial incentive for some Norwegians to bother with college, since they can get jobs more quickly, and earn almost as much money, working as plumbers or electricians. American advocates for higher education worry that a similar thing might be happening in the U.S., as people increasingly question the return on investment for degrees; a new federal report shows that the average annual earnings of 25- to 34-year-olds with bachelor’s degrees actually fell from $53,210 in 2000 to $46,900 in 2012, even as tuition continued to rise.

“A bachelor’s degree in the U.S. has been seen as one serious option for getting into the middle class, whereas in Norway everything is a ticket into the middle class, because everyone is in the middle class,” Rice said. “It’s now less clear that it really is a ticket into the middle class in the U.S.”

The causality here is a mystery:

American students’ scores on the SAT and other college entrance exams also correlate with the level of their parents’ educations; the better-educated a student’s parents, the higher he or she scores on the tests, according to the College Board, which administers the SAT.

Since education affects income, children whose parents didn’t go to college are also unlikely to be well off, said Margaret Cahalan, vice president for research at the Pell Institute for the Study of Opportunity in Higher Education. And families that are less well off are statistically more likely to face health problems, problems with the law and unplanned pregnancies, among other challenges.

Students from such backgrounds “are going to be on average facing more obstacles than a student who comes from a more advantaged background,” including nonfinancial ones, Cahalan said.

The credulity:

With a third of U.S. primary and secondary school students now coming from families without higher educations, the most important lesson is that cultural, and not just economic, considerations may keep many of them from going on to college.

Young people from backgrounds such as these, when considering whether or not to go to college, often “don’t even really know that they can go to the library and borrow books” instead of buying them, said Gomperts.

“How do you know that? You’re not born knowing such a thing. And who’s going to tell you? Stripping away the money piece shows how complicated this is.”

These poor things! No one has taught them about libraries in their first 13 years of public education!

In Baltimore Arrests are Down and Crime is Way Up

Sunday, June 14th, 2015

We are seeing a Ferguson effect in Baltimore, Alex Tabarrok notes — or, rather, a Freddie Gray effect:

Arrests in Baltimore have fallen by nearly 40% since Freddie Gray’s funeral and the start of the riots on April 27. In the approximately 3 months before the Gray funeral police made an average of 87.7 arrests per day, since that time they have made only 54.6 arrests a day on average (up to May 30, most recent data).

[...]

Not all arrests are good arrests, of course, but the strain is cutting policing across the board and the criminals are responding to incentives. Fewer police mean more crime. As arrests have fallen, homicides, shootings, robberies and auto thefts have all spiked upwards. Homicides, for example, have more than doubled from .53 a day on average before the unrest to 1.35 a day after (up to June 6, most recent data)–this is an unprecedented increase–and the highest homicide rate Baltimore has ever seen.

[...]

With luck the crime wave will subside quickly but the longer-term fear is that the increase in crime could push arrest and clearance rates down so far that the increase in crime becomes self-fulfilling. The higher crime rate itself generates the lower punishment that supports the higher crime rate (see my theory paper). In the presence of multiple equilibria it’s possible that a temporary shift could push Baltimore into a permanently higher high-crime equilibrium.

The Extraordinary Thing About WWII Is What Happened After

Tuesday, June 9th, 2015

The extraordinary thing about WWII, T. Greer reminds us, is what happened after:

The forces unleashed by the [An-Lushan Rebellion] eventually led to the complete disintegration of Tang power. This kind of collapse was not seen after the Second World War. The power that suffered the most was to emerge from the conflict as the world’s second strongest. But it was not just the Soviet Union that showed remarkable resilience — humanity as a whole weathered the destruction of two continents and the death of 70 million people barely worse for wear. This is a truly remarkable feat — perhaps one only possible in today’s Exponential Age. The Tang never recovered from the An-Lushan rebellion; Central Asia never blossomed like it did before the Mongol conquests; no new Roman empire rose from the ashes of the old. But the Second World War was not a precursor to a new dark age. Under the old rules of static civilization — where wealth was not created, but taken — catastrophes of this scale required centuries of recovery before old heights could be reclaimed. The history of the post-war world dramatically illustrates that this is no longer the case.

Greer is responding to Neil Halloran‘s The Fallen of World War II, which you must watch:

The Education Myth

Tuesday, June 9th, 2015

The push for better education is an experiment that has already been carried out globally, and the long-term payoff has been surprisingly disappointing:

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.

How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.

In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer. Moreover, much of this increase cannot possibly be attributed to education, as workers in 2010 had the advantage of technologies that were 50 years more advanced than those in 1960. Clearly, something other than education is needed to generate prosperity.

As is often the case, the experience of individual countries is more revealing than the averages. China started with less education than Tunisia, Mexico, Kenya, or Iran in 1960, and had made less progress than them by 2010. And yet, in terms of economic growth, China blew all of them out of the water. The same can be said of Thailand and Indonesia vis-à-vis the Philippines, Cameroon, Ghana, or Panama. Again, the fast growers must be doing something in addition to providing education.

The experience within countries is also revealing. In Mexico, the average income of men aged 25-30 with a full primary education differs by more than a factor of three between poorer municipalities and richer ones. The difference cannot possibly be related to educational quality, because those who moved from poor municipalities to richer ones also earned more.

And there is more bad news for the “education, education, education” crowd: Most of the skills that a labor force possesses were acquired on the job. What a society knows how to do is known mainly in its firms, not in its schools. At most modern firms, fewer than 15% of the positions are open for entry-level workers, meaning that employers demand something that the education system cannot — and is not expected — to provide.

When presented with these facts, education enthusiasts often argue that education is a necessary but not a sufficient condition for growth. But in that case, investment in education is unlikely to deliver much if the other conditions are missing. After all, though the typical country with ten years of schooling had a per capita income of $30,000 in 2010, per capita income in Albania, Armenia, and Sri Lanka, which have achieved that level of schooling, was less than $5,000. Whatever is preventing these countries from becoming richer, it is not lack of education.

A country’s income is the sum of the output produced by each worker. To increase income, we need to increase worker productivity. Evidently, “something in the water,” other than education, makes people much more productive in some places than in others. A successful growth strategy needs to figure out what this is.

How to turn a liberal hipster into a capitalist tyrant in one evening

Thursday, May 28th, 2015

Zoe Svendsen’s “play” at the Young Vic, titled World Factory, is more of an eye-opening roleplaying game:

The choices were stark: sack a third of our workforce or cut their wages by a third. After a short board meeting we cut their wages, assured they would survive and that, with a bit of cajoling, they would return to our sweatshop in Shenzhen after their two-week break.

But that was only the start. In Zoe Svendsen’s play World Factory at the Young Vic, the audience becomes the cast. Sixteen teams sit around factory desks playing out a carefully constructed game that requires you to run a clothing factory in China. How to deal with a troublemaker? How to dupe the buyers from ethical retail brands? What to do about the ever-present problem of clients that do not pay? Because the choices are binary they are rarely palatable. But what shocked me – and has surprised the theatre – is the capacity of perfectly decent, liberal hipsters on London’s south bank to become ruthless capitalists when seated at the boardroom table.

The classic problem presented by the game is one all managers face: short-term issues, usually involving cashflow, versus the long-term challenge of nurturing your workforce and your client base. Despite the fact that a public-address system was blaring out, in English and Chinese, that “your workforce is your vital asset” our assembled young professionals repeatedly had to be cajoled not to treat them like dirt.

And because the theatre captures data on every choice by every team, for every performance, I know we were not alone. The aggregated flowchart reveals that every audience, on every night, veers towards money and away from ethics.

Svendsen says: “Most people who were given the choice to raise wages – having cut them – did not. There is a route in the decision-tree that will only get played if people pursue a particularly ethical response, but very few people end up there. What we’ve realised is that it is not just the profit motive but also prudence, the need to survive at all costs, that pushes people in the game to go down more capitalist routes.”

This appears to be a revelation to the people involved.

In short, many people have no idea what running a business actually means in the 21st century. Yes, suppliers — from East Anglia to Shanghai — will try to break your ethical codes; but most of those giant firms’ commitment to good practice, and environmental sustainability, is real. And yes, the money is all important. But real businesses will take losses, go into debt and pay workers to stay idle in order to maintain the long-term relationships vital in a globalised economy.

Naturally the Guardian turns this into a call for more regulation.

Community Wisdom

Wednesday, May 20th, 2015

Conservation groups often write about community wisdom:

It seems to refer to the idea that rural communities know much better than others how to sustainably manage their environments and natural resources. Reading some of the NGO texts, all we need to do is to let environmental decision-making be guided by these community folks, and all will be fine. What a total crackpot idea!

I think community wisdom is a complete fallacy. More importantly, I worry that this bad joke is undermining the effectiveness of conservation efforts.

On exactly what information is the assumption based that local communities have the traditional wisdom, practices and altruistic interests to forego individual gain for greater communal benefit? As far as I am aware evidence points in exactly the opposite direction — communities are as unable to manage their environments sustainably as anyone else (urban folk, government institutions, industries etc.).

It doesn’t take much digging in the literature about community resource use in Indonesia to find evidence of communities locally exterminating species (like tigers or warty pigs on Java, or rhinos, orangutans, crocodiles or expensive song birds in Kalimantan and Sumatra), or natural resources like Ramin wood, which had been virtually wiped out in the lower Barito region in Kalimantan by 1840, about 120 years before industrial-scale logging started. Similarly, unsustainable slash-and-burn agriculture had already turned large parts of the Kapuas and Barito basins into grasslands by the start of the 20th century.

Of course, the scale of environmental destruction significantly increased after the 1960s when the technological and financial means became available to exploit the natural resources in vast parts of Indonesia. This represents a scale difference though and not an essential difference between local communities and all the other people, businesses and institutions.

Community wisdom may exist, but it doesn’t transfer to new conditions. If the old ways weren’t sustainable, they died out. And sustainable doesn’t mean awesome:

Most anthropological and social research in Indonesia shows that the forest people of Kalimantan and Sumatra cannot wait to get out of the forest, get their kids to decent schools, access to good hospitals, and comfortable roads to drive bikes and cars on. If they are stuck in their environment, it is more often than not because they do not actually have the means to get out. As soon as someone strikes gold (literally, or maybe a village-head selling some land to mining or oil palm) these forest-loving people in harmony with nature are off into the provincial cities on the next boat, bus or plane.

Hunting and Conserving Rhinos

Wednesday, May 20th, 2015

A Texas hunter bid $350,000 for the right to hunt a rhino in Namibia:

Knowlton’s $350,000 will go to fund government anti-poaching efforts across the country. And the killing of an older rhino bull, which no longer contributes to the gene pool but which could harm or kill younger males, is part of the science of conservation, he argues.

Naturally, this makes him a terrible person:

“I think people have a problem just with the fact that I like to hunt,” Knowlton said. “I want to see the black rhino as abundant as it can be. I believe in the survival of the species.”

How Wealth Shapes Personality

Monday, May 4th, 2015

Jessi Streib explains how wealth in childhood shapes personality later in life:

People who grew up in households without much money, predictability, or power learn strategies to deal with the unexpected events that crop up in their lives. Often, these strategies are variations of going with the flow and taking things as they come. Sometimes there’s no other option.

Isabelle, for example, is the daughter of a farmer and a bartender. (All the survey participants have been given pseudonyms.) Her family did not know how much money each year’s crops or tips would bring in. They did not know when a debt collector would call. Thinking about money could not change the fact that it came in unpredictably and that sometimes there wasn’t enough. With little she could do to change the situation, Isabelle learned to go with the flow. She would not think too much about money, but spend as she needed to get by.

People who grew up with parents who had more money, job security, and power grow up with more stable lives. In these conditions, they learn that managing their resources makes sense — both because their lives are predictable enough that they can plan and because their resources are plentiful enough that they can make meaningful choices. Spouses with middle-class backgrounds wanted to manage their resources by planning.

Leslie, another woman who participated in the study, grew up the daughter of a manager. Her family had enough money and power that they had options. They could decide whether to spend money to go on a vacation or to invest in private school. Either way, their plan could be carried through.

This difference — taking a hands-off approach or a hands-on one — followed individuals from their pasts and into their marriages.

It shaped nearly every aspect of their adult lives. In regards to money, work, housework, leisure, time, parenting, and emotions, people with working-class roots wanted to go with the flow and see what happened, while their spouses with middle-class backgrounds wanted to manage their resources by planning, monitoring, and organizing.

There’s an obvious question of causality there.

The Hidden Politics of Video Games

Saturday, May 2nd, 2015

If you’re going to discuss the hidden politics of video games, perhaps a long list of explicitly political simulations isn’t the way to go:

Games can be criticized for being too violent, or a brain-dead waste of time. But they are not usually criticized for being political. Games are entertainment, not politics, right?

However, consider the popular computer game Sim City, which first debuted in 1989. In Sim City, you design your metropolis from scratch, deciding everything from where to build roads and police stations to which neighborhoods should be zoned residential or commercial. More than a founder or a mayor, you are practically a municipal god who can shape an urban area with an ease that real mayors can only envy.

But real mayors will have the last laugh as you discover that running a city is a lot harder than building one. As the game progresses and your small town bulges into a megalopolis, crime will soar, traffic jams will clog and digital citizens will demand more services from their leaders. Those services don’t come free. One of the key decisions in the game is setting the municipal tax rate. There are different rates for residential, commercial and industrial payers, as well as for the poor, middle-class and wealthy.

Sim City lets you indulge your wildest fiscal fantasies. Banish the IRS and set taxes to zero in Teapartyville, or hike them to 99 percent on the filthy rich in the People’s Republic of Sims. Either way, you will discover that the game’s economic model is based on the famous Laffer Curve, the theoretical darling of conservative politicians and supply-side economists. The Laffer Curve postulates that raising taxes will increase revenue until the tax rate reaches a certain point, above which revenue decrease as people lose incentive to work.

Finding that magic tax point is like catnip for hard-core Sim City players. One Web site has calculated that according to the economic model in Sim City, the optimum tax rate to win the game should be 12 percent for the poor, 11 percent for the middle class and 10 percent for the rich.

In other words, playing Sim City well requires not only embracing supply-side economics, but taxing the poor more than the rich. One can almost see a mob of progressive gamers marching on City Hall to stick Mayor McSim’s head on a pike.

Sim City is only a game, yet it is notable how many people involved in economics say it gave them their first exposure to the field. “Like many people of my generation, my first experience of economics wasn’t in a textbook or a classroom, or even in the news: it was in a computer game,” said one prominent financial journalist. Or the gamer who wrote, “SimCity has taught me supply-side economics even before I studied commerce and economics at the University of Toronto.”

Other games also let you tinker with politics and economics. Democracy 3 allows you to configure the government of your choice. The ultra-cynical Tropico is the game where the player—who is El Presidente of a kleptocratic Latin American government—can win by stashing enough loot in his Swiss bank account. In Godsfire, a 1976 boardgame of galactic conquest, players roll dice each turn to see what kind of government rules their empire. Extremist governments only build warships to attack their neighbors, Moderates spend less on defense and more on economic growth and Reactionaries will only spend money on planetary defenses (which also double as domestic riot suppression systems for keeping the citizenry in line).

However, the best example of politics and games is the legendary Civilization, an empire-builder and bestseller since it debuted in 1991.

[...]

Admittedly, some Civ political depictions are debatable. Communism in Civ 4 increases food and factory production and reduces waste from corruption? Someone should have told this to the Soviets in 1989, or China’s rulers today. Authoritarian regimes can’t create new technologies? Cheery news for Londoners who watched their city destroyed by Nazi V-2 rockets in 1944. Democracies embrace science? In Civ 3, the first nation to discover Darwin’s Theory of Evolution gets a science bonus, a game feature that some Kansas school boards would disapprove of.

What is most remarkable about the politics of Civ is how unremarkable all this seems to an American like myself.

All that is given to us

Thursday, April 30th, 2015

Problems in Baltimore run much deeper than Mr. Gray’s death and the conduct of the police, according to the New York Times:

Near the burned-out CVS, Robert Wilson, a college student who went to high school in Baltimore, said: “With the riots, we’re not trying to act like animals or thugs. We’re just angry at the surroundings, like this is all that is given to us, and we’re tired of this, like nobody wants to wake up and see broken-down buildings. They take away the community centers, they take away our fathers, and now we have traffic lights that don’t work, we have houses that are crumbling, falling down.”

I can’t imagine why the people currently acting like animals or thugs haven’t been given better surroundings. What was the House Fairy thinking?

Why CEOs make so much money

Tuesday, April 28th, 2015

A retired CEO explains why CEOs make so much money — or, rather, why they started making so much more a couple decades ago:

Thank our regulators and corporate governance efforts to reduce CEO compensation through disclosure and oversight of board decisions.  I’ve been a long time observer of public companies and a reader of their proxy statements. In 70’s and even the 80’s the compensation of the CEO seemed to be mostly a matter arrived at between the board and the CEO that resulted from discussions and negotiations and the public disclosure was a matter of a few pages. But there was then nothing like the  pressure to conform to best practices backed up by the reliance upon the advice of consultants and the concommitant availability of market data that there is today.

You can guess how it works. No board that isn’t about to fire its CEO really wants to admit that their CEO is a less-than-average performer by paying him or her less than average. But if the lowest-paid CEO’s are always being brought up to the average, then the average increases every year. Then for the high performers to be paid well, their compensation needs to be increased, but that raises the average… and so on every year. And the compensation committee and the board always have this market data before them, the recommendations of their consultants and “best practices” to adhere to. These influences are not easily resisted. You see the result.

Like many regulatory unintended consequences, it’s hard for me to see an easy way back. But it’s more than an academic question if you are a director serving on a compensation committee.