Monthly Archives: January 2014

No tiger mom would have let her daughter publish this piece for a fifth grade project, let alone in the New York Times. Amy Chua, in a little under 3000 words, explains her theory of power and prosperity in modern America. Absent from this essay, however, is a single reference to any scientific study. Not only does the article exclude any hyperlinks – appalling for any serious journalism in the 21st Century – it refers to several anonymous “studies” without providing any information about the authors, making it well-nigh impossible for a reader to track it down. 

The form is bad, but the message is worse. Chua and Rubenfeld (who, surprise surprise, extol Asians and Jews) argue that Asian success is largely a function of a superiority complex tempered by deep insecurity and a low discount rate, that is delayed gratification. They argue that initial wealth disparity is largely irrelevant:

The most comforting explanation of these facts is that they are mere artifacts of class — rich parents passing on advantages to their children — or of immigrants arriving in this country with high skill and education levels. Important as these factors are, they explain only a small part of the picture.

In fact, it would be comforting if the propensity towards prosperity could be captured in three, wishy-washy traits shared by a large group of people. Reality is much more complicated, as the authors surely understand, and a host of other factors do matter. Responsible journalism would demand that Chua and Rubenfeld at least acknowledge the limitation of this argument in this form, but readers are not made aware of any competing explanations.

The facts are also pretty shaky. The authors contend:

Today’s wealthy Mormon businessmen often started from humble origins. Although India and China send the most immigrants to the United States through employment-based channels, almost half of all Indian immigrants and over half of Chinese immigrants do not enter the country under those criteria. Many are poor and poorly educated. Comprehensive data published by the Russell Sage Foundation in 2013 showed that the children of Chinese, Korean and Vietnamese immigrants experienced exceptional upward mobility regardless of their parents’ socioeconomic or educational background.

The words here quietly pull wool over the eyes of a casual reader. Half of Indian immigrants do not enter the country under the intense criteria of employment-based channels. That means half do. I wonder what percent of caucasian, black, or latino children have parents that work in jobs important enough to qualify for such visas. The figure is certainly well below 50%.

While some Indian emigre are definitely “poor and poorly educated”, even the immigrants who enter without a Bachelor’s degree face the hard climb out of India to begin with. The initial culture and characteristic of Indians who have the wherewithal to pay for a ticket to the United States and the gumption to take that risk sets this group far apart from the immigrant culture. An observer need only walk through London – to which the entry barriers for an Indian are (or at least used to be) substantially lower – to see that the rich Indians of America are a lucky exception, not the rule.

It is interesting to compare the fate of Indians – who are by far the richest ethnicity in the United States, earning on average more than $85,000 annually – with their Sri Lankan, Pakistani, and Bangladeshi compatriots who earn $65,000, $61,000, and $46,000 respectively. Cultural differences are a natural explanation, but Indians are closer to all of these groups than they are with caucasians suggesting that there is something else going on. Of course, if one is inclined to think that this story is about Indians in general (as opposed to Indian-Americans) he need only see that Sri Lanka is twice as prosperous as India, Pakistan is not all that much poorer, and Bangladesh, while a little poorer, fares better on many social indicators.

This tells us that there’s something special about the type of Indians that make it to America. Whether it be education, intelligence, or an entrepreneurial spirit, it would be ridiculous – in the words of Chua and Rubenfeld – to compare this attribute to this group’s some stereotypically-selected characteristics not shared by caucasians.

It would be remiss to discuss Indian-American success without considering medical professionals, an oddly protected class. Wikipedia tells me that 35,000 Indians are physicians which is fivefold larger than what would be expected from a random distribution. However, the American Medical Association (approximately a cartel) and inefficiently strong health-related regulation prevent the equilibrium rate inflow of medical professionals keeping the wage rate of doctors artificially high, suggesting that many Indians benefit from an artifact of the law rather than some cultural force.

Groups rise and fall over time, and that may even be for the reasons suggested in the article. But by the authors’ own logic, the United States should be scared shitless of Japanese and Korean prosperity – surely these countries, with their laborious education and work ethic, must be more prosperous? New York Times readers may be interested to learn that the average American earns a whole $20,000 more than the Koreans, despite our “failing” school systems and complacence. Some may be tempted to argue that this is largely due to affluent immigrants, but remember that Caucasians earn at or above the national average.

Children of successful immigrants, like myself, are in many ways as privileged as blue-blooded protestants. And, similarly, many of us feel every bit as entitled (we work hard, but I doubt many of us think that we’ll actually ever earn $46,000 a year by the time we have kids). While at an archetypical level it may appeal to speak of certain traits – superiority, insecurity, and self control – shared by many successful immigrants, this is informed by neither theory nor evidence, but rather someone’s wish to project her idea of success onto a group as a whole.

Ultimately, some parts of this article are unimpeachably accurate. No doubt that attaining power and prosperity demands hard work, patience, and confidence. This is common sense, and not in any significant way restricted to immigrants. The authors further a sad misconception among liberal elites – that immigrants work hard while complacent Americans watch TV. This couldn’t be farther from the truth. Americans – particularly the stagnant middle – are among the most hard working (even overworked) in the world. Moreover, these workers are also incredibly productive by international standards, bringing in over $60 per hour on average.

I conclude by agreeing with Chua’s conclusion. It is crucial for America as a political entity to rekindle a sense of urgency and insecurity vis-a-vis China, but this is not at all a mirror of similar conclusions they draw to Americans as a cultural group. China’s ascendence is almost irrelevant on a per capita basis, where even the 80th percentile of urban workers hardly hold a candle to the 20th percentile of all American workers. China’s relevance is predicated on the control this one political entity has on such large a group of people.

More importantly, America’s glory to which the authors allude, while supervised by a sense of insecurity, was almost entirely political. Bipartisan consensus let America fight, and indeed win, the Cold War by putting a man on the moon, passing landmark civil and social legislation, and overseeing the most rapid rise in living standards in the country’s history. But, if anything, Americans work harder today while politicians flounder. This is a story of politics, not people.

I am open to disagreement on this issue, and a piece with actual references may be a nice start.


Monetary offset has been on my mind for a while now. Scott Sumner (among other market monetarists) are running victory laps (and to an extent, rightfully so) considering the relatively healthy growth last year despite significant fiscal drag. There’s no doubt, as stock and bond market reactions prove, that monetary policy has been helpful. But both the theory and empirics behind a strong and automatic offset – as favored by market monetarists – is weak. I should preface this by noting I’m largely in agreement with the market monetarist argument for nominal income targeting.

Let’s imagine (for now) that the zero bound did not bind – whether that be through the efficacy of unconventional monetary tools, a higher inflation target, or a Herculean ability for the Fed to handcuff its own hands years into the future and convince the market that it threw away the key. Standard economic theory supposes that in this world fiscal policy does not determine the price level given an inflation-targeting central bank arguing that if the government increases its budget and hence aggregate demand, the central bank will increase rates to maintain credibility. Hence government spending cannot decrease unemployment.

If we’re talking about totally discretionary stimulus this may be true. But consider a government that offers generous unemployment insurance (UI) with reemployment credits or guarantees employment (either generally or in a recession). Soon after recession, the government institutes very long UI and, in doing so, increases its primary deficit from 2% to 10%. Let’s say hysteresis effects are minimal and expansionary policies don’t simultaneously increase aggregate supply. Expansionary spending then, by Law of the Excluded Middle, either increases the price level or it does not. Given an upward-sloping supply curve (depressed as the economy might be), the former case is more likely. Monetarists argue that an independent central bank offsets policy in one of the following ways:

  • By force of expectation, given its credibility to an inflation target.
  • By being more cautious with its stimulus programs (or halting them altogether, depending on relevant magnitudes) than the counterfactual without stimulus or deeper austerity.

It feels like the first point used to be more popular than it is now, given that the Fed has zilch credibility on its inflation target (by definition, if it had any credibility, long term expectations wouldn’t be as low as they are). The second point is pretty fragile given behavioral features, decentralization of central banking decisions, and the need to have a precise ability to estimate price level elasticity of aggregate supply if it is low (which it is in a weak economy).

So after the government promises insurance to layoffs and credits to employers who hire said layoffs the central bank estimates the effect this has on the price level and accordingly decreases the rate at which it purchases assets. This creates a new wave of unemployed workers – that, after all, is the core of monetary offset models – which would require even more deficit spending to finance the promised unemployed benefits. This would require an even greater offset, requiring even more stabilization.

In this case two things can happen. Either the value of a credit default swap on Treasuries increases, as the market starts loosing confidence that we can service future deficits, or prices rise as markets expect the Fed to monetize deficits in an effort to prevent default. In a world where bond yields and CDS values aren’t soaring, the only possible conclusion is that the Fed stops offsetting government spending.

In fact, to the extent the market knows the Fed would never let the government default, the Fed’s offset would be offset by expectations of its future relaxation of its offset. This sounds a lot like the fiscal theory of the price level, and in some sense it is, but the distinction is that there must be some mechanism in place that requires the government to increase its deficit in response to monetary contraction. If there was no such mechanism – i.e. fiscal policy was only a one time, discretionary cash hand out – monetary policy could offset austerity perfectly well. (A helicopter drop of money and cash hand out financed by bond buying is actually the same thing, so offset could be surgically precise, as both Keynesians and monetarists agree). The only way fiscal theories could work in this environment is a government that engages in discretionary policy every time the central bank tightens policy which is unrealistic and, by definition, not rules-based. So the possibility of hyperinflation from ARRA was well, nonexistent.

There are second order effects too. If the interest elasticity of government spending is higher than the interest elasticity of investment (and studies suggest that this is probably the case), much of the benefit from easier money comes from cheap finance to beneficiary governments, reducing net outlays. Therefore tighter policy would decrease both the government’s primary and non-primary balance. This, by the way, is not negligible – the United States may face $75 billion in increased debt servicing to finance the same level of operations.

If the political situation is such that the government may only engage in a certain level of deficit spending (either by law as in Europe or institutional arrangement as in the US) offset would require the government itself to tighten its budget.

The point of the post so far is that monetary offset cannot be as theoretically sound as its proponents make it seem. There are multiple sources of positive and negative feedback, and actual results depend on the precise role of each which itself depends on the complex slew of automatic stabilizers, central bank learning mechanisms, and so forth. However, as outlined above, that economic conditions today resemble that setup seem unlikely given the preponderance of automatic stabilizers.

The empirical case for full monetary offset is stronger, but still wanting. Yes growth was a lot stronger than some Keynesian models suggested. That itself doesn’t mean anything, especially for anyone that (like me) believes in an at least approximate efficient market hypothesis. No model that can predict growth can exist. The question is whether growth today violates the Keynesian story. Perhaps a macroeconometrician will answer this better than I, but frankly the magnitudes don’t justify that explanation either. While fiscal drag was unfortunate, the United States certainly didn’t succumb to the same austerity as Europe and within the margin that it did plenty of other factors, including an improving supply side, can explain strong growth beyond monetary offset. As for Europe, where’s the offset?

Let me end this post with a final example which captures the point of the above reasoning. Imagine the government guaranteed employment at below market wage rates as a primary automatic stabilizer. In a recession, as deficits increase, monetary offset would force a growing number into government employment. The logical conclusion would be a huge deficit and huge government work force, but not unemployment by virtue of the government’s promise to employ. The only way total GDP would be affected would be a decreased output per worker, a supply-side phenomenon because the government makes for a bad employer. But supply-side concerns are not market monetarists’ concern. Is there any model with guaranteed employment monetary offset decreases total employment?

Of course, deficits would never get so out of hand before the central bank stopped offsetting. But even monetarists agree that monetary offset would not increase employment, only government deficit. By virtue of that transfer of liabilities, the private sector is allowed to deleverage which itself increases aggregate demand.

The feedback loops here are just way too complicated for the simple monetary offset story to be true.

Late Addendum: Scott Sumner comments on his blog (in response to another):

I’ve always argued that zero is a sort of benchmark, a starting point in the analysis. If the fiscal stimulus is large enough to bankrupt a country, then for fiscal theory of the price level reasons I’d expect a positive multiplier. In not (i.e. in the US) I expect the multiplier is zero on average, but may be above or below zero for the reasons you indicate. What matters is the expected multiplier, not the actual multiplier, and I see no reason to expect a multiplier that is significantly different from zero. In 2013 we saw about what I expected.

That’s fair enough. But the point here is bankruptcy conditions are non-negligible with automatic stabilizers. Not in general, but certainly if the offset is persistent (that is if the “expected multiplier” remains at or near zero).