Thursday, December 30, 2021

Findland Findings on Meritocracy

Notes on a Remarkable Finding from Finland

I recently came across a paper by Ursina Schaede and Ville Mankki that contains a fascinating empirical finding with major implications for the way in which we think about meritocracy.

The paper examines the long run effects on students of a change in the manner in which their teachers were selected into a graduate program. Finland is well known for having an extremely effective school system, in part because primary teacher education has been "exclusively taught as a research-oriented, five year masters' degree at universities" since the 1970s. These programs are in very high demand among applicants, with acceptance rates of about 10 percent. The admissions process has a first stage based largely on scores on a high school matriculation exam, followed by a second stage involving interviews and the evaluation of live teaching. Candidates are ranked again at the end of the process, and those at the top are taken until capacity is filled.

For a number of years, acceptance into the second stage was based on a quota, ensuring that at least 40 percent of students making it through the first stage of evaluation were male. Although this did not place any constraint on second stage outcomes, it turned out that the entering classes (and hence several cohorts of trained teachers) did not differ much in gender composition from those making it through the first stage. The quota was abolished in 1989, leaving first stage outcomes unconstrained. The first post-quota cohort thus graduated in 1994.

The paper examines the causal effects of this change on the long run outcomes for students. Identification is facilitated by variations across municipalities in the age distribution of teachers at the time of quota removal, coupled with mandatory retirement at age 60. This means that students were differentially exposed to the newer post-quota cohorts, which had a different gender composition (fewer males) and a different distribution of scores on the matriculation exam (higher scores on average).

The authors find that students differentially exposed to the quota-constrained cohorts of teachers ended up with better educational attainment and labor force participation at age 25. In other words, removal of the quota led to a decline in student performance. While this finding is interesting in its own right, even more interesting are the mechanisms that the authors rule out, and the one that they eventually accept.

Could the effect be arising through a role model channel, with particular benefit for boys? No, the authors find "no evidence for boys' educational attainment being more affected from exposure to male quota teachers relative to girls," and none of their "main effects differ systematically or significantly by pupil gender."

Could it be that male and female teachers bring different benefits to the table, with the whole being greater than the sum of its parts? This would be a benefit from diversity. The authors cannot rule this out entirely (the estimates are too noisy) but they do find that "the benefits of adding an additional male teacher are similar in magnitude between places with few male teachers and places where the share of men among colleagues is already high."

What, then, do the authors think is driving their results? They argue that the evidence "is consistent with male quota teachers contributing positive qualities to the school environment that are not sufficiently captured by the selection criterion in absence of the quota."

It is important to be clear about this, because the finding can be so easily misunderstood. It is not that the quota teachers proved effective because they were male. It is that the distributions of important characteristics (unmeasured by scores) were not identical across male and female applicant pools. The quota was picking up individuals with these characteristics by proxy. It is the characteristics that mattered for students, not the gender of the teacher.

For example, male teachers in the data were "slightly more likely to come from rural areas and to live in their region and municipality of birth when compared to female teachers." So a quota that favored rural applicants or those who had not moved from their municipality of birth could have had similar effects. In fact, this helps explain the mechanism—if rural applicants have fewer resources on average, they will have higher ability conditional on any given score than applicants from more resource-rich urban environments.

In fact, it is extremely likely that even within a given applicant group (men or women), the conditional distribution of these other valuable characteristics is not independent of score. There may be a particular range of scores at which these other characteristics happen to be especially abundant. In this case a policy that optimizes benefits for students may not even be monotonic within group—some people with higher scores would be skipped over in favor of those with somewhat lower scores.

This possibility is discussed at length in a recent paper with Rohini Somanathan that I will present at a symposium at Yale next week. The event has been organized by Gerald Jaynes and Rohini Pande, and is open to all (with registration).

Of course, policies that are non-monotonic (within group) would give rise to incentive effects, and probably could not be sustained. But the conceptual point they raise is that the understanding of meritocracy in public discourse is terribly impoverished. If one were to design a truly meritocratic policy, it could well have features that resemble the pursuit of representation targets. Meritocratic policies will not, in general, involve the application of a common score threshold across all candidates.

I understand that Ursina is on the academic job market this year and that this is the paper she'll be presenting. I think that the work will be influential, and I wish her luck.

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By Rajiv Sethi  ·  Launched a year ago

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Sunday, December 26, 2021

Lifting the Lid on Global Inequality [feedly]

Lifting the Lid on Global Inequality

The reality captured by the World Inequality Report 2022 reflects human choices, which means that it can be changed by making other choices. That is why the report is not just a valuable compendium of useful data and analysis but also a guide to action.

NEW DELHI – The World Inequality Report 2022produced by the Paris-based World Inequality Lab, is a remarkable document for many reasons – starting with its demonstration of the immense power of patient collective research.

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The report provides the latest estimates, based on careful aggregation of national data from a multitude of sources, of income and wealth inequality at the national, regional, and global level. It gives long-run time-series data for these indicators, allowing us to consider recent patterns in a broader historical context. And it expands on different dimensions of inequality in revealing new ways.

Any research enterprise as ambitious as this one will inevitably elicit quibbles about the datasets used, the assumptions required to generate particular series, and the ways in which some data gaps have been filled. My own minor criticism relates to the World Inequality Lab's use of purchasing power parity (PPP) exchange rates to determine and compare national incomes across countries.

As I have argued elsewhere, while PPP exchange rates appear to control for cross-country differences in price levels and living standards, they are ridden with conceptual, methodological, and empirical problems. For starters, PPP exchange rates assume that the structure of each country's economy is similar to that of the benchmark country (the United States) and changes in the same way over time. When applied to developing economies, this assumption is especially weak.

Moreover, the convoluted weighting procedure for goods can result in the inclusion of unrepresentative, high-priced products that are rarely consumed in some countries. For example, Angus Deaton has noted how packaged cornflakes may be available in poor countries but are bought by only a relatively small minority of rich people. Expenditure weights from national accounts do not reflect the consumption patterns of people who are poor by global standards.

There is a further, and possibly even more troubling, conceptual issue. High-PPP countries – that is, those where the actual purchasing power of the local currency is deemed to be much higher than its nominal value – are typically low-income economies with low average wages. PPP is high precisely because a significant section of the workforce receives very low remuneration, which means that goods and services are available more cheaply than in countries where the majority of workers receive higher wages. The widespread incidence of unpaid labor in many poor households in low-income countries further amplifies the effect. So, it is clear that the local currency's greater purchasing power reflects conditions of indigence and low or no remuneration for what could even be the majority of workers.

PPP-modified GDP data may therefore miss the point. By regarding greater purchasing power of a given monetary income as an advantage, rather than a reflection of the greater absolute poverty of the majority of an economy's workers, PPP estimates effectively overstate poorer countries' incomes compared to those of rich economies.

For all these reasons, relying on PPP exchange rates in cross-country income comparisons – including for poverty and inequality measures – is extremely problematic. There is a strong case for sticking to market exchange rates in measuring cross-country inequality, which would likely reveal much greater disparities than those evident in the World Inequality Report.1

This objection notwithstanding, the report adds much to our understanding of inequality, especially through two new measures. The first is the female share of labor income, which is a useful indicator of gender inequality. Globally, this share has remained largely unchanged over the past three decades, at one-third, and has been as low as 10-15% in the Middle East and North Africa (MENA) and below 20% in Asia excluding China. This indicator captures not just labor-market imbalances, but also, implicitly, the greater proportion of unpaid work performed by women within households and communities, which reduces their access to paid work and affects their remuneration in paid employment.

The second innovative measure examines inequality in carbon-dioxide emissions by assessing contributions by income category across countries. The important finding here is that, while inequalities in emissions across regions are high and persistent, such disparities exist not only between rich and poor countries, but within them. There are high emitters among the rich in low- and middle-income countries, and relatively low emitters among the poor in high-income countries.

For example, the richest 10% of people in the MENA region emit 33.6 tons of CO2 per person per year, compared to less than ten tons among the bottom half of the income distribution in North America. (The bottom 50% in Sub-Saharan Africa emit one-twentieth of the North American amount, or 0.5 tons per capita per year.)1

Globally, the richest 10% of the population is responsible for more than half of all CO2 emissions. This point is especially important because, as the report notes, environmental policies like carbon taxes hit the poor the hardest, but this group is rarely if ever compensated for such measures. The new indicator enables a much richer consideration of what socially just climate policies should look like, both within and across countries.

Predictably, the report is strong on appropriate redistributive policies, especially the potential for increased taxation of wealth and corporate profits. There is also scope for looking more closely at "predistribution," or the range of regulatory regimes and legal codes that have enabled today's excessive concentration of wealth and income in the first place.

The primary cause of "predistributive" inequality is, in a word, privatization: of finance, the natural commons, the knowledge commons (through intellectual-property rights), and public services and amenities. One could add to that states' tendency – glaringly obvious since the 2008 global financial crisis – to protect large-scale private capital, while allowing it to wreak havoc on ordinary citizens.

The reality captured by the World Inequality Report reflects human choices, which means that it can be changed by making other choices. That is why the report is much more than a valuable compendium of useful data and analysis. It is a guide to action.

Jayati Ghosh


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Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission for the Reform of International Corporate Taxation.

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PK's Potent Breakdown on Manchin: What We Lose if We Don’t Build Back Better [feedly]

What We Lose if We Don't Build Back Better

I'll leave the savvy political analysis to others. I don't know why Senator Joe Manchin apparently decided to go back on an explicit promise he made to President Biden. Naïvely, I thought that even in this era of norm-breaking, honoring a deal you've just made would be one of the last norms to go, since a reputation for keeping your word once given is useful even to highly cynical politicians. I also don't know what, if anything, can be saved from the Build Back Better framework.

What I do know is that there will be huge human and, yes, economic costs if Biden's moderate but crucial spending plans fall by the wayside.

Failure to enact a decent social agenda would condemn millions of American children to poor health and low earnings in adulthood — because that's what growing up in poverty does. It would condemn millions more to inadequate medical care and financial ruin if they got ill, because that's what happens when people lack adequate health insurance. It would condemn hundreds of thousands, maybe more, to unnecessary illness and premature death from air pollution, even aside from the intensified risk of climate catastrophe.

I'm not speculating here. There's overwhelming evidence that children in low-income families who receive financial aid are significantly healthier and more productive than those who didn't once they become adults. Uninsured Americans often lack access to needed medical care and face unaffordable bills. And studies show that policies to mitigate climate change will also yield major health benefits from cleaner air over the next decade.

As an aside, it's not clear how many Americans realize the extent to which we're falling behind other nations in terms of meeting basic human needs. For example, I still keep running into people who believe that we have the world's highest life expectancy, when the reality is that we can expect to live between three and five fewer years than citizens of most European countries.

There are also, by the way, large and growing gaps between U.S. states. In 1979 life expectancy in West Virginia was only about 14 months shorter than in New York; by 2016 the gap had widened to six years. And yes, Manchin's home state would benefit immensely from the social spending its Democratic senator seems determined to block.

The weakness of the U.S. social safety net also has economic consequences. It's true that we still have high gross domestic product per capita — but that's largely because Americans take far less vacation time than their counterparts abroad, which means that they produce more because they work more hours. In other ways we lag. Even before the pandemic, Americans in their prime working years were less likely to be employed than citizens of Canada or many European countries, probably in part because we don't help adults stay in the work force by providing child care and parental leave.

But can we afford to make our lives better? One answer is that other rich countries seem to manage it just fine. Another answer is that Manchin's objections to the proposed legislation evaporate under scrutiny.

Manchin asserted that the Congressional Budget Office determined that the cost of the bill is "upwards of $4.5 trillion." No, it didn't. That was a Republican-demanded estimate of outlays — not the considerably smaller impact on the deficit — under the assumption that everything in the legislation would be made permanent, which isn't what the bill says. And if Congress did vote to extend programs like the child tax credit, it would probably also vote for revenue offsets. The budget office analysis of the legislation as actually written — which found it roughly deficit-neutral — is a much better guide to its likely fiscal impact than this rigged hypothetical.

As for Manchin's claim that we have a "staggering" national debt, maybe it's worth noting that federal interest payments as a percentage of G.D.P. are only half what they were under Ronald Reagan, and that if you adjust for inflation — as you should — they're basically zero.

What about inflation? The proposed spending in Build Back Better is spread over multiple years, so it wouldn't do a lot to raise overall demand in the near term — the first-year addition to the deficit would be just 0.6 percent of G.D.P., which isn't enough to make much difference to inflation in any model I know. Besides, the Federal Reserve has just made it clear that it's ready to raise interest rates if inflation doesn't subside, so government spending should matter even less.

As I said, I'm not going to try to analyze Manchin's thought processes, and I'll leave it to others to speculate about his personal motives. What I can say is that the letter he released to explain why he said what he said on Fox News doesn't read like a carefully worked-out policy statement; it doesn't even read like a coherent ideological manifesto. Indeed, it feels rushed — a grab bag of Republican talking points hastily trotted out in an attempt to justify his abrupt betrayal and to portray himself as a victim.

Sorry, but no. America — not a senator who's taking heat for a broken promise — is the victim in this story.
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Chile: copper-bottomed? [feedly]

Chile: copper-bottomed?

The victory of former student leader and activist Gabriel Boric in Chile's presidential election is the culmination of a sweeping change of mood and direction among Chilean voters.  In a 56% turnout, the highest since voting was made voluntary, 35-year old Boric took 56% of the vote compared to ultra-right Antonio Kast's 44%.  

Boric has pledged to stop mining projects that damage the environment, increase taxes on the rich, end private pension schemes and remove student debt. During his victory speech, Boric, who is part of a broad left-wing coalition that includes the Chilean Communist party, said he would oppose mining initiatives that "destroy" the environment. That included the contentious $2.5bn Dominga mining project that was approved this year. 

Earlier this year, elections to Chile's Constituent Assembly resulted in a majority for the (disparate) left.  The Assembly is supposedly rewriting the Constitution to replace the authoritarian structure of the Pinochet military regime after 40 years.  But Chile's Congress (parliament) is split down the middle between right and left coalitions.

Chile is the richest country in Latin America as measured by GDP per head.  But its 20m population makes it tiny compared to Mexico or Brazil, which have populations six to ten times larger and GDPs four to five times larger.  Argentina and even Venezuela are much larger in population and GDP.

Nevertheless, Chile's real GDP growth rate has generally been slightly faster than the rest of Latin America and its governments have thus been relatively stable.  Many mainstream economists and political theorists often use this to claim that Chile is a 'free market' capitalist economic success story and consider Chile as the "Switzerland of the Americas". Chile is a member of the OECD, the rich nations club, and in the (NAFTA-USMCA) trade bloc with Canada, Mexico and the US.

But this apparent success story is only relative in GDP growth compared to other Latin American economies.  Moreover, such gains have mainly gone to the rich in Chile.  Income inequality is among the worst in the OECD, only surpassed by Brazil and South Africa. 

The income share of the bottom decile in Chile is one of the lowest in the world.  Only a few countries, largely from Latin America, have lower income share accruing to the bottom decile of the distribution and this share has deteriorated in relative terms in the last 20 years.  Social spending (as a share of GDP) in Chile appears higher than in Mexico and Peru.  But public services have been reduced, forcing people to use private profit operations.  In particular, pensions are dominated by private sector companies and most Chileans find their savings for retirement are just too meagre to fund a decent standard of living in old age.

This was one of the big issues in the election and led to the widespread protests against pro-capitalist policies in 2019 (before COVID) which has now culminated in Boric's election.  The IMF found that 'replacement rates' (ie pensions relative to average working income) in Chile are very low relative to other OECD economies, and this deficiency is even more pronounced for females than for males.

Amid high and rapidly increasing costs of living alongside limited income growth and low pensions, many households have accumulated considerable amounts of debt.

Taxes on the rich are very low, so that income redistribution is lower than almost all OECD peers and many other poor economies.

Chile's relative economic success has always been based on its copper and mineral exports.  If copper and mineral prices are high and rising, Chile's economy does better and conversely – but of course, little of that 'trickles' down from the profits of multi-nationals to the average Chilean household.

There have been some Marxist analyses of the Chilean economy that show how the profitability of Chilean capital has been driven by the copper cycle. Diego Polanco in his study for the whole of 20th century noted that "capital accumulation is driven by profitability" and that "the profit rate is a crucial variable for economic growth."  Polanco found that and collapse of profitability explained the crisis phases in the Chilean capitalist economy.  "While Chile was a surplus labor economy, technical change had favorable contributions to the profit rate. However, once the process of urbanization advanced, Marx-Biased Technical Change took place, having a negative contribution to profitability."  The neo-liberal period under Pinochet from the 1970s saw a rise in profitability enabling the regime to maintain its control for decades.

In a more recent study, Gonzalo Duran and Michael Stanton found that the rate of exploitation in Chile's economy rose or fell according to the movement of the copper price. Profitability fell during the 1990s as copper prices stayed low and Marx's law of profitability operated to lower the rate of profit. "In contrast, during the copper super-cycle period of 2004–2009, profits related to wages went up enormously due to the rise in copper prices, but new capital was still imported at low cost and wages were relatively constant. In other words, profits went up relatively to capital and wages and the ROP rose as a consequence."

However, with the end of the commodity price boom from 2010 across Latin America, there was relative economic stagnation and a fall in the ROP.

My own measure of Chile's profitability is based on the Penn World Tables IRR series. It delivers a similar trajectory for the profit rate: a drop in the rate from the mid-1990s; then a recovery in the commodity boom from 2003 to 2010, and then with the collapse of commodity prices from 2010, stagnation and decline in profitability.

The IMF's own recent measure from 2006 confirms this general trajectory for all Latin American economies after about 2010.

The fall in profitability after 2010 led to slowing growth in GDP, investment, incomes and a further squeezing of public services prior to the COVID slump.  With COVID and the health disaster, there was a collapse in the economy, with the main impact falling on those with the lowest incomes and worst jobs.  The pro-capitalist forces have been forced into retreat politically.

The victory of Boric could open up a new chapter is Chile's political economy.  Indeed, there are huge opportunities for the Chilean economy to increase investment and diversify the economy.  The IMF finds that even under the previous regimes there has been some development in non-mineral and technology exports.  This must be the way for Chile to go.

So will Boric revive the socialist experiment began by Salvador Allende in the early 1970s?  So far, that seems unlikely, as Boric's program is moderate by those standards; with no plans to socialise the economy, but merely to try and redistribute the largesse appropriated by capital somewhat more evenly.  The multi-nationals and the forces of the reactionary right-wing in the Chilean business sector, Congress and the media are gearing up for an incessant campaign of attack against the new President.

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