What We’re Reading

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Bringing the State Back In (to the discussion on redistribution and innovation)

SoupCarLine

In recent months, the New York Times has published a series of opinion pieces that read like an abbreviated syllabus in comparative political economy. An analytic piece from late April chronicling the (perhaps) excessive generosity of Danish social democracy kicked off the discussion, prompting a response from Nancy Folbre as well as a “Room for Debate” roundtable on the sustainability of continental welfare states. The Folbre piece linked above makes brief reference to a recent(ish) paper by Acemoglu, Robinson and Verdier (ARV) which argues that while some countries may be able to combine robust welfare states with sustained economic growth, all countries can’t do so at the same time without retarding global innovation rates. They explain their argument succinctly in the short version of their piece:

The fact that technological progress requires incentives for workers and entrepreneurs results in greater inequality and greater poverty (and a weaker safety net) for a society encouraging more intense innovation. Crucially, however in a world with technological interdependence, when one (or a small subset) of societies is at the technological frontier and contributing disproportionately to its advancement, the incentives for others to do so will be weaker. In particular, innovation incentives by economies at the world technology frontier will create higher growth by advancing the frontier, while strong innovation incentives by followers will only increase their incomes today since the world technology frontier is already being advanced by the economies at the frontier.

America: enduring child poverty and substandard education so you don’t have to. You’re welcome, Sweden.

Thomas Edsall has a piece from April evaluating this argument in light of some countervailing claims, and it’s well worth a read. Whether redistributive incentives are really the key driver of cross-national innovation rates deserves serious critical scrutiny. It’s also worth thinking in normative terms about whether one might tolerate a slower iPhone development cycle (or even – gasp – a lack of iPhones altogether) for the sake of greater social equity.

That aside, however, the ARV model seems plausible. Anyone who has dug a bit into the literature on Varieties of Capitalism will recall the basic claim about innovation: both ‘cutthroat’ liberal market economies (LMEs) and ‘cuddly’ coordinated market economies (CMEs) innovate, but do so differently. LMEs, with their flexible labor markets and ubiquitous-but-impatient venture capital, make radical technological leaps, while CMEs are better at incremental advances. America develops the Fordist production system, Germany makes cars that don’t suck. The ARV model takes this observation to its logical conclusion: CME incrementalism relies on LMEs to expand the technological frontier. For those of us who would like to see a more robust safety net and more egalitarian distribution of post-transfer income, this is discomfiting.

I don’t have anything close to the formal chops necessary to critically evaluate the technical specifics of the ARV model. I would, however, make two observations about its real-world importance and applicability. First, as the authors briefly acknowledge, people have tried to test some of the implications of their thesis. Taylor (2004) and Akkermans, Castaldi and Los (2007) both use patent data to compare innovation rates between “cutthroat” LMEs and “cuddly” CMEs. The former article finds no discernible difference between them, while the latter finds limited and industry-specific support for the notion that LMEs innovate the fastest and/or most radically. ARV do cite both of these efforts, but don’t really address the complications they present to their central argument.

Second, and more crucially, much of the discussion around this question ignores the state’s potential to drive innovation through direct investment in science. ARV treat innovation as a function of incentive structures facing potentially innovative individuals or firms. “Cutthroat” economies, with their looser regulation and weaker redistributive regimes, provide innovators with stronger incentives to invest capital in risky-but-potentially-innovative ventures. State investments in R&D, though, could plausibly drive innovation on the supply side by providing resources in a manner divorced (or at least estranged) from market pressures.

To cite a few well-worn American examples, many of the technological advances crucial to the twenty-first century economy happened outside the private sector. The first general-purpose computer was developed to calculate artillery firing tables for the U.S. Army. The microprocessor was developed by NASA in order to miniaturize computers for guidance and navigation during the Apollo program. The packet switching network that became today’s internet was first developed by ARPA (now DARPA), an advanced research agency within the Pentagon. Today, the National Institutes of Health commits a budget of roughly $30 billion per year to biomedical research, including the kind of risky basic research that may not generate immediate commercial returns, but can lead to radical innovations over time. The NIH alone represents almost a third of the money spent on health research in the United States, and is likely the reason that America is a leading innovator in this sector. The National Science Foundation commands another $7 billion to fund research across scientific disciplines (with one, ahem, notable exception). More trivially, that self-driving car that Google has been promoting like mad recently? It also has its roots in a series of DARPA initiatives.

I don’t mean to suggest that the private sector doesn’t drive a substantial majority of innovation in contemporary developed economies. Even the NIH budget, colossal by any standard, represents less than half the capital devoted to biomedical research in the United States. Nor is all state-funded research created equal. Some work suggests that state subsidies of private sector R&D initiatives may crowd out, in whole or in part, private investment in similar projects (a cursory lit review indicates mixed evidence on this score). Still, if the concern is that more egalitarian societies might de-incentivize the kinds of risky bets that lead to radical technological leaps, that effect could be at least partially offset by direct public investment. It may yet be possible to subsidize school lunches without gutting technological progress.

What We’re Reading

  • Fair and balanced: “Over the past few months, the (state-run) People’s Daily in China has launched a lovely series called “Dishonest Americans.”  Supposedly this is meant to give Chinese readers a more balanced and “objective” picture of American life, when juxtaposed with their own overly rosy impressions. Or so the PD editor has claimed: ‘Most Chinese people think that Americans are honest, reliable, and righteous. However, once you live in that country for a while, you may discover the descriptions above are a bit misleading.'”
  • Mitra and Ray test a model for economically motivated ethnic violence in India: “The fact that Muslim expenditures display a significant and positive connection with later conflict, while Hindu expenditures have a negative link, suggests that (statistically speaking) Hindu groups have largely been responsible for Hindu-Muslim violence in India, or at least for violence driven by instrumental, specifically economic considerations.”
  • Katherine Boo, Behind the Beautiful Forevers: “These poor-against-poor riots were not spontaneous, grassroots protests against the city’s shortage of work. Riots seldom were, in modern Mumbai. Rather, the anti-migrant campaign had been orchestrated in the overcity by an aspiring politician–a nephew of the founder of Shiv Sena. The upstart nephew wanted to show voters that a new political party he had started disliked bhaiyas[migrants from North India] like Abdul even more than Shiv Sena.” (Though, to be clear, in Boo’s book at least it seems as if these particular riots targeted anyone from North India in the slums, and while the character Abdul’s family happens to be Muslim, it’s not clear if his Muslim-ness is especially relevant to this riot.)
  • Paul Staniland examines cooperation between rebels and democratically elected governments in India over at the Monkey Cage. Make sure to check out his related working paper on the long-term consequences of government use of “non-state armed groups” as well. These groups, and especially their interaction with state actors, remain poorly understood but Paul is doing some great work to advance our knowledge.
  • How to Play Well with China: Fascinating look at US-China relations in the 21st century by Ian Bremmer and Jon Huntsman. It’s not necessarily a pessimistic piece but this part does not exactly inspire confidence: “In some ways, the stakes are higher for Mr. Obama and Mr. Xi than they were for Ronald Reagan and Mr. Gorbachev. There is no American-Chinese nuclear threat to focus minds on stronger ties, nor is there a Berlin Wall to separate the two countries’ fortunes. For better and for worse, America and China are bound together in a form of mutually assured economic destruction.”

Survivorship Bias, Sample Sizes, and the Oregon Medicaid Study

I think most coverage of the Oregon Medicaid Study [gated] has been bad. Very bad. I wanted to flag one way that it has been especially bad.

We don’t do very much U.S. domestic politics on the Smoke-Filled Room but I think the broader methodological issues are worth highlighting. So, for those that don’t obsessively follow wonkish U.S. policy debates, a bit of background. When Oregon expanded Medicaid coverage a few years back, it did so via a lottery. That allowed researchers to compare outcomes between those who received Medicaid and those that did not. And they found no statistically significant improvement on several metrics of physical well being (cholesterol checks, blood pressure checks, etc.). They did find statistically significant improvements in terms of mental health (principally depression) and financial health (apparently from not having catastrophic health expenditures). In general, physical metrics moved in the expected direction (lower blood pressure) just not sufficiently in that direction to be indistinguishable from zero. This could either be true evidence of a null relationship between insurance and health outcomes, or it could be a sign that the study was too small to capture changes in those outcomes. If you look at the study, the fact that something like 22 out of 25 metrics move in the expected (healthier) direction, even if they don’t move far in that way, suggests to me that Medicaid does improve health outcomes. But that’s a separate issue.

Two conservative, smart writers are Ross Douthat of the New York Times and Megan McArdle of the Atlantic. Both are forced to acknowledge that the Oregon Medicaid Study shows Medicaid coverage generates strong financial and mental health benefits for Medicaid recipients, but argue rhetorically: Wasn’t this about saving lives? Douthat asks, “The health care law was sold, in part, with the promise (made by judicious wonks as well as overreaching politicians) that it would save tens of thousands of American lives each year.” McArdle, drawing on the same rhetorical playbook stresses, “[W]e heard that 150,000 uninsured people had died between 2000 and 2006.” See, classic liberal over-promising and under-delivering. You told us poor people would live, not that they would be less depressed and more financially secure.

The important thing is that the Oregon Medicaid Study was a “post-treatment” survey. I’m using “treatment” in the jargon-y way. I just mean assignment via lottery to either the “treatment condition” of receive Medicaid for two years or the “control condition” of continuing insurance free for two years. It’s right there on the first page of the article: “Approximately 2 years after the lottery, we obtained data from 6387 adults who were randomly selected to be able to apply for Medicaid coverage and 5842 adults who were not selected.” To be even more precise, and requiring Douthat and McArdle to turn to the second page of the article, they collected this data via in-person interviews.

Let’s just stop right here. Dead people tell no tales. Hence they were not included in the study. The study occurred only on those people that lived to talk at the end. Medicaid could have saved 1000 lives in Oregon and this research design would not have noticed. Or Medicaid could have killed 1000 people. Same thing. This is what we like to call survivorship bias. It’s so simple, I don’t see the need to belabor the point.

But let’s imagine the study had been designed differently. At this level of power, would we have noticed? A little quick math: about 20% of Americans are uninsured, studies suggest being uninsured is associated with about 20,000 additional deaths a year nationally (U.S. population ~300m), and the control group was about 6000 people. The expected value of uninsured “excessive” deaths in this study is this rate of “excessive” deaths caused by lack of insurance per uninsured person per year times the total number in the control group. I think that gets us about 2 excessive deaths per year, or 4 excessive deaths for the period under study. I’d be very surprised if this study would be able to discern, in a statistically significant way, if Medicaid saved lives. (The death rate in the United States is 799.5/100000, meaning out of our 6000 folks, we’d expect about 96 deaths in these two years.) Even without survivorship bias.

My point: the Oregon findings in no way impugn the possibility that 20,000 Americans a year die from lack of insurance, and that Medicaid might save them. This is true solely because of survivorship bias, though sample size problems make it doubly true.

Replication: The Heart of Science

There are allegations that the Reinhart and Rogoff paper “Growth in a Time of Debt,” which has informed the current debate about debt and spending as much as any economic paper could hope, is wrong. And it’s wrong because of a data processing error, specifically what appears to be an MS Excel formula error (see here, here, or here). The original Reinhart and Rogoff working paper has over 450+ Google Scholar citations and that understates its influence in the three years since it was published.

Every dataset I have looked at has problems, and the only question is whether those problems when fixed lead the results to “break.” In practice, as a field, we seem to be okay with small fractures, things that get p-values to .07 or .11 instead of the magical .05. Journal editors don’t want to reward replication articles that merely fiddle with someone else’s hard work, though this gives authors an incentive to fiddle with their own work at the margins.

In part because replication work is rarely rewarded with journal articles, the hard work of replication, crucial for any sort of cumulative knowledge, is more or less left to graduate students in mid-level stats courses. The fact that Thomas Herndon, apparently a grad student at the UMass-Amherst Econ program, is listed as first author of this new critique makes me wonder if this sort of “replication paper” requirement is the source of this discovery.

David Cameron and Centrifugal Crises

British Prime Minister David Cameron made waves in late January when he announced plans to hold a referendum on the U.K.’s continued membership in the European Union. Should the Conservatives win elections in 2015, Cameron promised a simple “in or out” referendum on E.U. membership by 2017.  The move seems to have roots in domestic politics. Cameron faces considerable pressure from the Eurosceptic wing of his own party as well as a challenge from the UK Independence Party, which has been surging along the Conservatives’ political flank.

This all raises the prospect that, absent Conservative defeat or a Europhilic turn on the part of the British public, one of the core members (and key funders) of the E.U. could make an ungraceful exit in the coming years. In the long term, this could prove a greater threat to the viability of the European project than the economic woes of more peripheral members like Greece and Spain.

Labour leader Ed Miliband sharply criticized the proposal and hardened his own opposition to such a step (though support from some of his backbenchers may be shaky). Nick Clegg, whose Liberal Democrats are members of the Conservative governing coalition, dissented sharply as well. Heads of state in Europe did not react warmly to the news, nor to the strong-arm tactics it represents. Former Prime Minister Tony Blair said Cameron’s brinksmanship could backfire: “It reminds me a bit of the Mel Brooks comedy Blazing Saddles where the sheriff says at one point as he holds a gun to his own head: ‘If you don’t do what I want I’ll blow my brains out.’ You want to watch out that one of the 26 [other EU member states] doesn’t just say: ‘OK, go ahead.'”

Extra points for the Mel Brooks reference, and for having the good sense not to repeat the quote verbatim.

Cameron’s move seems risky, but makes sense in light of both domestic and international factors. In addition to shoring up cracks in his governing coalition, his announcement seems designed to increase his leverage in upcoming negotiations over the E.U. budget. Cameron himself is not a hard Eurosceptic, but his support for a pro-Europe vote in any future referendum has now been made implicitly contingent on his receiving an acceptable offer from his counterparts on the continent. By publicly committing to a referendum, Cameron presents Paris, Berlin and Brussels with the choice of either buying British support for a “yes” vote or hoping that the Conservatives lose the next election. How palatable they’ll find either option remains an open question.

That being said, Brian Taylor points out that the Tories may be undermining their position on the question of Scottish sovereignty:

They have said that the [Scottish National Party] cannot guarantee Scottish membership of the EU, post independence.

The Nationalists have, of course, contested that vigorously but, at the very least, the issue gained some traction.

Now what do the Tories say on this topic?

Reject the SNP, stick with the UK – and we will offer you the prospect that a vote across the whole of these islands may take you out of the EU, perhaps in contradistinction to opinion in Scotland.

In a bid to reassert the economic and political autonomy of Britain, then, the Tories could end up actually weakening the British state.

Whatever the outcome, this episode highlights the contradictory and self-undermining nature of elite responses to the ongoing economic crisis in Europe. Years of austerity, some of it imposed at the encouragement or insistence of Brussels, have made the financial burdens of European integration heavier for the continent’s economic core. At the same time they have constricted recovery and led to anemic growth, high unemployment, and prolonged economic misery.

It would be naive to say that say that such conditions “cause” nationalist or parochial backlash, but the economic crisis does seem to be having centrifugal effects on multiple fronts.

On the one hand, it puts sustained pressure on the political and economic bargains that make the E.U. viable. Though not a member of the Eurozone, Britain is a major net donor to the E.U. (see chart from Le Monde, below) and the third largest economy in Europe. Its departure would represent a major shock to the institution.

EU Contributions; Le Monde

On the other hand, the crisis has intensified sub-national fissures in a number of member states. Separatist and nationalist movements in Scotland, Catalonia and Flanders have all seen their fortunes improve since the onset of the crisis. They present an interesting twist on what Frederick Solt calls “new-nations” theories of economic distress and nationalism (see Brown, Hechter and Brass). In their simplest forms, such theories predict sub-national mobilization by groups that are materially deprived relative to society at large. Relative deprivation is key.  Here, though, nationalist grievances have coalesced around a different narrative. Separatist elites have made hay over the uneven financial burdens imposed by ‘society at large’ on local prosperity. As movements, they seek to protect the fruits of relative affluence rather than overcome relative deprivation.

Recent developments in the U.K. suggest how these super-national and sub-national crises of legitimacy could become mutually reinforcing. The specter of an E.U. exit undermines confidence in the national state’s position as a point of access to European markets and institutions. This in turn raises the stakes of regional separatist politics by sharpening the distinction between national and European alignment.

Cameron may well be able to balance these competing interests for the moment. Acute though the current crisis may be, the institutional roots of both the E.U. and the United Kingdom run deep, and continue to reflect considerable elite and popular consensus. That said, centrifugal pressures across the region seem unlikely to abate until Europe can return to robust and broadly shared growth, something which the broader policies of recent years have done much to forestall.