Alex Tabarrok's Thanksgiving lesson:

It’s one of the ironies of American history that when the Pilgrims first arrived at Plymouth rock they promptly set about creating a communist society. Of course, they were soon starving to death.

Fortunately, "after much debate of things," Governor William Bradford ended corn collectivism, decreeing that each family should keep the corn that it produced. In one of the most insightful statements of political economy ever penned, Bradford described the results of the new and old systems.

[Ending corn collectivism] had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression...

Among Bradford’s many insights it’s amazing that he saw so clearly how collectivism failed not only as an economic system but that even among godly men "it did at least much diminish and take off the mutual respects that should be preserved amongst them." And it shocks me to my core when he writes that to make the collectivist system work would have required "great tyranny and oppression." Can you imagine how much pain the twentieth century could have avoided if Bradford’s insights been more widely recognized?

Who led the subprime loans?

Countrywide was a growing force in the mortgage industry when it partnered with Fannie in 1992. But after Mozilo's firm secured a steady government buyer for their loans, business exploded. Revenues went from $92 million in 1992, to $860 million in 1996, to $2 billion in 2000. By 2004, they were the nation's largest mortgage lender.

The secret to Countrywide's success was no mystery: They shredded standard industry lending practices, giving home loans to virtually anybody who asked. Fannie Mae not only knew this, Fannie rewarded it.

In 2000, the Fannie Mae Foundation honored Countrywide for "Outstanding Achievement" in the industry. The foundation's 2000 annual report noted: "When necessary -- in cases where applicants have no established credit history, for example -- Countrywide uses nontraditional credit, a practice now accepted by [Fannie]."

Countrywide continued to be the biggest supplier of loans to Fannie Mae all the way through the height of the housing boom. In 2004, 26 percent of the loans Fannie bought were from Countrywide. In 2007, that number had risen to 28 percent.

In his 1993 Nobel Prize lecture, economist Douglass North said, "If the institutional framework rewards piracy, then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations -- firms -- will come into existence to engage in productive activities."

From 1992 through the height of the housing bubble, Fannie Mae and Freddie Mac used their monopoly position in the mortgage securitization industry to reward firms like Countrywide for making bad bets in the housing market. Countrywide's success was a signal to other market participants to lower their standards as well.

Wall Street banks are not blameless for the financial crisis. But they were only responding to the incentives set up by the federal government.

Scott Winship on inequality:

One way to assess the extent of mobility is to ask whether people tend to be better off than their parents were at the same age — whether they experience upward absolute mobility. Research for EMP conducted by my colleagues at the Brookings Institution Julia Isaacs, Isabel Sawhill, and Ron Haskins shows that two-thirds of 40-year-old Americans are in households with larger incomes than their parents had at the same age, even taking into account the fact that the cost of living has risen. That’s pretty impressive, but it actually understates the improvement between generations. Household size declined over these decades, so incomes now are divided up among fewer family members, leaving them better off than bigger households of the past. Another EMP study shows that when incomes are adjusted for household size, four out of five adults today are better off than their parents were at the same age.

The finding of pervasive upward absolute mobility flies in the face of liberal accounts of a stagnant middle class. These accounts generally conflate disappointing growth in men’s earnings with growth in household income, which has been impressive. Growth in women’s earnings has also been impressive, but economic pessimists have twisted these bright spots to fit a gloomy narrative. They claim that household incomes have kept pace only because wives have been forced into work to make up for the shrinking bacon their husbands bring home. That ignores the long-term trend of women’s obtaining more education in industrialized nations around the world, presumably with an intention to put it to use in the work force someday. It also ignores the evidence that married men rationally chose to reduce their work hours as their wives increased theirs (even as single men continued working the same hours), and the fact that employment grew more among the wives of better-educated men than among the wives of less-educated men.

James Pethokoukis highlights a number of ways in which concerns about income inequality are mostly an artifact of overly broad statistical measures:

A pair of studies from 2007 and 2008 conducted by the Federal Reserve Bank of Minneapolis supports Gordon. Researchers examined why the Census Bureau reported median household income stagnated from 1976 to 2006, growing by only 18 percent. In contrast, data from the Bureau of Economic Analysis showed income per person was up 80 percent. Like Gordon, they found apples-to-oranges issues such as different ways of measuring prices and household size. But in the end, they concluded that “after adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.” In addition, research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

A 2008 paper by Christian Broda and John Romalis from the University of Chicago documents how traditional measures of inequality ignore how inflation affects the rich and poor differently: “Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994–2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged.”

A 2010 study by the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan notes that official income inequality statistics indicate a sharp rise in inequality over the past four decades: “The ratio of the 90th to the 10th percentile of income, for example, grew by 23 percent between 1970 and 2008.” But Meyer and Sullivan point out that income statistics miss a lot, such as the value of government programs and the impact of taxes. The latter, especially, is a biggie. The researchers find that “accounting for taxes considerably reduces the rise in income inequality” over the past 45 years. In addition, “consumption inequality is less pronounced than income inequality.” (emphasis in original)

It makes you wonder why Congress has never investaged, nor outlawed, these deceptive business practices:

Here is an amazing glimpse into the dark side of the force that is Hollywood economics. The actor who played Darth Vader still has not received residuals from the 1983 film "Return of the Jedi" because the movie, which ranks 15th in U.S. box office history, still has no technical profits to distribute.

How can a movie that grossed $475 million on a $32 million budget not turn a profit? It comes down to Tinseltown accounting. As Planet Money explained in an interview with Edward Jay Epstein in 2010, studios typically set up a separate "corporation" for each movie they produce. Like any company, it calculates profits by subtracting expenses from revenues. Erase any possible profit, the studio charges this "movie corporation" a big fee that overshadows the film's revenue. For accounting purposes, the movie is a money "loser" and there are no profits to distribute.

Max Boot on Smart Diplomacy:

But Mr. Maliki and other Iraqi political figures expressed exactly the same reservations about immunity in 2008 during the negotiation of the last Status of Forces Agreement. Indeed those concerns were more acute at the time because there were so many more U.S. personnel in Iraq—nearly 150,000, compared with fewer than 50,000 today. So why was it possible for the Bush administration to reach a deal with the Iraqis but not for the Obama administration?

Quite simply it was a matter of will: President Bush really wanted to get a deal done, whereas Mr. Obama did not. Mr. Bush spoke weekly with Mr. Maliki by video teleconference. Mr. Obama had not spoken with Mr. Maliki for months before calling him in late October to announce the end of negotiations. Mr. Obama and his senior aides did not even bother to meet with Iraqi officials at the United Nations General Assembly in September.

The administration didn't even open talks on renewing the Status of Forces Agreement until this summer, a few months before U.S. troops would have to start shuttering their remaining bases to pull out by Dec. 31. The previous agreement, in 2008, took a year to negotiate.

The recent negotiations were jinxed from the start by the insistence of State Department and Pentagon lawyers that any immunity provisions be ratified by the Iraqi parliament—something that the U.S. hadn't insisted on in 2008 and that would be almost impossible to get today. In many other countries, including throughout the Arab world, U.S. personnel operate under a Memorandum of Understanding that doesn't require parliamentary ratification. Why not in Iraq? Mr. Obama could have chosen to override the lawyers' excessive demands, but he didn't.

Contrary to popular myth, public school teachers make more than private sector workers

Richwine and Biggs found that when public school teachers and private sector workers are compared objectively on the basis of cognitive skills -- rather than years of service or educational attainment -- the educators enjoy higher compensation -- contrary to the claims of union officials in public debate and in negotiations with school boards.

This is seen most dramatically when workers switch from non-teaching jobs to teaching jobs. Such a move typically results in a wage increase of approximately nine percent. "Teachers who change to non-teaching jobs, on the other hand, see their wages decrease by roughly 3 percent. This is the opposite of what one would expect if teachers were underpaid," Richwine and Biggs said.

The biggest factor in the compensation advantage enjoyed by public school teachers is not wages, however, but rather fringe benefits, which typically are substantially more generous than those paid to private sector workers in cognitively comparable positions.

"More generous fringe benefits for public-school teachers, including greater job security, make total compensation 52 percent greater than fair market levels, equivalent to more than $120 billion overcharged to taxpayers each year. Teacher compensation could therefore be reduced with only minor effects on recruitment and retention," Richwine and Biggs conclude. (emphasis mine)

The original study is here.

Should be be worried about reports of rising income inequality?

2. The CBO fails to factor in that American households in the top income quintile have, on average, almost five times more family members working than the lowest quintile. (Analysis by AEI blogger Mark Perry.) Those folks are also far more likely, as Perry notes, than lower-income households to be well-educated, married, and working full-time in their prime earning years. Perry also notes that “individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes.” (Indeed, a Treasury study on income mobility found that starting in 1996, half of taxpayers who started in the bottom 20 percent had moved to a higher income group by 2005.)

3. Price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor.

4. Apples-and-oranges kinds of issues—such a differences in household size and inflation indexes—has led highly respected Northwestern University professor Robert Gordon to conclude that the “rise in American inequality has been exaggerated both in magnitude and timing.”

5. The Minneapolis Federal Reserve concluded—after taking into account household size and differing price indexes—median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

Ultimately, I don't care how fast the income of the wealthy is rising, as long as the incomes of the middle class and the poor are rising too. And the data says they are.

What does the data say about the importance of teacher quality?

1. Project STAR was an experiment designed to test the effect of class size. The experiment found that students assigned to small classes earned $4 more per year. If you add demographic controls, students assigned to small classes earned $124 less per year. (more)

2. You can use Project STAR's data to (non-experimentally) test for other effects. When you do, almost all measures of teacher quality fail to increase adult earnings:

The few other observable teacher characteristics in the STAR data (degrees, race, and progress on a career ladder) have no significant impact on scores or earnings.

3. There is one measure of teacher quality that does matter: Whether the teacher has more than 10 years of experience. Chetty et al. find that students assigned to a kindergarten teacher over this experience cut-off eventually earn $1093 extra dollars per year. But bear two reservations in mind. (a) The t-stat is only 2.4 - extremely low for a non-experimental test with 6005 observations. (b) If you measure experience in years, rather than using their binary "more than 10 years of experience" variable, the point estimate is a statistically insignificant $57 per year.

4. Teacher experience only matters in kindergarten:

The effect of teacher experience on test scores is no longer statistically significant in grades 1-3. Consistent with this result, teacher experience in grades 1-3 also does not have a statistically significant effect on wage earnings.