I spent much of this weekend at the annual American Economic Association conference here in Chicago. The conference is the biggest gathering of economists anywhere in America (approximately 10,000 in all) and features a non-stop orgy of wonky discussions, multiple-variable regressions, and eager grad students looking to get hired. A few cultural observations: economists are far more given to wearing suits than any other kind of academic I’ve ever seen. Really: it looked like an accounting conference. (The two exceptions being the European grad students, who were noticeably more stylish, and the lefty, heterodox economists who eschewed suits in favor of jeans, sweater vests and the occasional pair of Tevas.)
There were about five papers during each time slot that I wanted to see, so it was impossible to get around and take in everything, but I got to see a number of stimulating discussions. Here are a few things I learned:
1. Women are disproportionately represented among the set of workers hurt by “free trade.” In her paper Trade-Related Job Losses: A Gender Analysis, Ramya M. Vijaya analyzed what happens to workers who lose their jobs due to outsourcing. Many of them attempt to take advantage of the federal Trade Adjustment Assistance program, which funds retraining. Those who enroll in the program are mostly women, and, surprisingly, those who get retrained for jobs in a different sector than the one they lost end up recouping less of their former salary than those who don’t retrain. Keep this in mind the next time you hear a politician touting “job retraining” as a way of mitigating the distributional effects of US trade policy.
2. People don’t have much financial literacy, and those who do are much more likely to be highly educated. This may not seem like a shocking result, but it’s worth noting that signficant variations in basic (and I mean basic) financial knowlege aren’t really accounted for in the traditional neo-classical models. Indeed, the putative rationale for shifting retirement management to 401ks, and defined contribution programs is that individuals as rational actors are going to most efficiently allocate their capital and grow their wealth. In Financial Literacy and Planning: Implications for Retirement Wellbeing [pdf], Annamaria Lusardi and Olivia S. Mitchell put this notion to the test. Their methodology is very simple. They inserted three very basic questions about finance into the annual Health and Retirement Study. Here’s an example of one; “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?” As easy as this question may seem, fully one third of the respondents got it wrong.
To quote their abstract:
Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third correctly answered these two questions and a question about risk diversification. Women, minorities, and those without a college degree were particularly at risk of displaying low financial knowledge.
This all may seem obvious, but it’s hugely important that the authors have established it empirically. Financial illiteracy is not evenly distributed and therefore retirement systems that depend on levels of financial literacy are going to further exacerbate inequalities of wealth distribution.
3. The current mainstream, neo-classical economics models don’t take into account the ways in which human behavior is affected by norms, and if the did, the economic models might look very, very different. This point was made in great detail by outgoing AEA president and Nobel Laureate George Akerlof in his talk, The Missing Motivation in Macroeconomics [pdf]. The speech was fascinating for a variety of reasons I hope to discuss in an upcoming article, but here’s Louis Uchitelle’s write-up in the Times.
All in all, the sense I got from the weekend is that slowly but surely the economics field is changing, becoming more open and pluralist, and less committed to the rigid orthdoxy developed by the neo-classical economists of the last generation. There’s still a tremendous amount of status hierarchy attached to who gets counted as “mainstream,” but there’s something brewing in the field, and it might have some very significant effects in our policy discussions.