Economics

Eduardo Porter interviewed me in addition to his column, here is one excerpt:

What about other consequences of inequality? There is evidence that it hurts mobility, sapping young men’s incentives to succeed. Some have suggested it corrupts our political system and could fuel social unrest.

We know very little about what income inequality tends to cause in politics. We do see that income inequality is up considerably and crime is down considerably. We do know that older societies, as we are becoming, tend to be more peaceful and stable. We also see that a rising middle class often leads to political instability, such as in Thailand or Turkey or Brazil or for that matter the United States in the 1960s. Many young American men may be experiencing a crisis of confidence these days, but the problem lies in the absolute quality of their opportunities, not the gap between them and Bill Gates.

And this:

If we are looking for a remedy, a greater interest in strict religions would help many of the poor a lot — how about Mormonism for a start? Just look at the data. Many other religions prohibit or severely limit alcohol, drugs and gambling. That said, this has to happen privately rather than as a matter of state policy.

Here is the whole thing.

 

The rest of the WaPo story, by Lydia DePillis, is here.  Here is one excerpt:

The market for consumer-facing economists is certainly getting crowded. Big Internet companies have had chief economists for years now; Google’s Hal Varian is an oft-quoted exponent of his employer’s capabilities and worldview. Microsoft recently hired Yahoo’s former chief economist to push a more “data-driven culture” at the tech dinosaur.

But they’re not just looking for super-wonks. More importantly for Richardson, rival real estate sites Zillow, Trulia, and CoreLogic have offered their chief economists as media-friendly talking heads, always available to explain national trends: Stan Humphries, Jed Kolko, and Mark Fleming have essentially become their companies’ most visible employees, speaking at conferences and testifying on Capitol Hill. That’s why Apartmentlist.com’s recent listing for a chief economist includes the following in its job description: “Act as the face of the company with key journalists for both print and tv interviews with leading publications,” “work closely with our PR and branding teams,” and have “excellent stage presence.”

File under “Those New Service Sector Jobs.”

Ukraine fact of the day

by on July 30, 2014 at 10:59 am in Current Affairs, Economics | Permalink

The Ukrainian economy shrank 4.7 per cent annually in the second quarter, far deeper than expected and casting a cloud over the assumptions that underpin the International Monetary Fund’s $17bn bailout.

That follows a 1.1 per cent year-on-year contraction in the first quarter. Given the ongoing unrest in eastern Ukraine, where much of the industrial base can be found, economic growth is unlikely to pick up later this year.

There is more here.

He has a very good column on this topic today, here is one excerpt:

“The returns to growth are going to people in other countries, most notably China, and generally to people with high I.Q., no matter where they live,” said Tyler Cowen, a professor of economics at George Mason University and a contributor to the Economic View column in The New York Times. “I don’t really know how you could undermine this dynamic, short of wrecking the world. Trying to deny that logic is going to fail or worse, backfire.”

Mr. Cowen, who describes himself as a libertarian with a lowercase “l,” is the author of “Average Is Over: Powering America Beyond the Age of the Great Stagnation,” (Dutton, 2013), which posits that technology and globalization have essentially split the labor market in two: high and low earners. Far fewer stable jobs are left over in the middle to support what through much of the 20th century we called the middle class.

In his view, the defining challenge of our era is that workers in the bottom half of the distribution can no longer trust that their living standard will double every generation. “The right moral question is ‘are poor people rising to a higher standard of living?’ Inequality itself is the wrong thing to look at,” he told me. The real problem is slow growth.

“The best way to address rising inequality is to focus on increasing educational attainment,” Professor Mankiw said. Mr. Cowen adds other potentially useful policies, like expanding the earned-income tax credit or using urban policy to, say, make it easier for people who are not rich to live in San Francisco.

The full story is here, interesting throughout.

While European governments deny paying ransoms, an investigation by The New York Times found that Al Qaeda and its direct affiliates have earned at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just in the past year.

In various news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period.

These payments were made almost exclusively by European governments, who funnel the money through a network of proxies, sometimes masking it as development aid, according to interviews conducted for this article with former hostages, negotiators, diplomats and government officials in 10 countries in Europe, Africa and the Middle East. The inner workings of the kidnapping business were also revealed in thousands of pages of internal Qaeda documents found by this reporter while on assignment for The Associated Press in northern Mali last year.

In its early years Al Qaeda received most of its money from deep-pocketed donors, but counterterrorism officials now believe the group finances the bulk of its recruitment, training and arms purchases from ransoms paid to free Europeans.

The full story is here. by Rukmini Callimachi.  Oh, and don’t forget this:

Negotiators take a reported 10 percent of the ransom, creating an incentive on both sides of the Mediterranean to increase the overall payout, according to former hostages and senior counterterrorism officials.

It turns out that Al Qaeda hardly ever executes prisoners any more.

For the pointer I thank Michael Rosenwald.

Israel’s major problem is that circumstances always change. Predicting the military capabilities of the Arab and Islamic worlds in 50 years is difficult. Most likely, they will not be weaker than they are today, and a strong argument can be made that at least several of their constituents will be stronger. If in 50 years some or all assume a hostile posture against Israel, Israel will be in trouble.

Time is not on Israel’s side. At some point, something will likely happen to weaken its position, while it is unlikely that anything will happen to strengthen its position. That normally would be an argument for entering negotiations, but the Palestinians will not negotiate a deal that would leave them weak and divided, and any deal that Israel could live with would do just that.

What we are seeing in Gaza is merely housekeeping, that is, each side trying to maintain its position. The Palestinians need to maintain solidarity for the long haul. The Israelis need to hold their strategic superiority as long as they can. But nothing lasts forever, and over time, the relative strength of Israel will decline. Meanwhile, the relative strength of the Palestinians may increase, though this isn’t certain.

Looking at the relative risks, making a high-risk deal with the Palestinians would seem prudent in the long run. But nations do not make decisions on such abstract calculations. Israel will bet on its ability to stay strong. From a political standpoint, it has no choice. The Palestinians will bet on the long game. They have no choice. And in the meantime, blood will periodically flow.

There is more here, of interest throughout, via Eric Reguly.

For the most part, no, although financial repression is an issue to look out for.  There is a new NBER Working Paper by Jens Hilscher, Alon Raviv, and Ricardo Reis which works through the numbers:

We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.

“Financial repression will be a harbinger of inflation” is an underrated sentence.  Another is “short-term debt structure is the new gold standard,” as it limits the revenue gains from higher inflation.  There are ungated copies of the paper here.

…trade typically favors the poor, who concentrate spending in more traded sectors.

That is from Pablo D. Fajgelbaum and Amit K. Khandelwal, the full paper is here.

Alan S. Blinder and Mark W. Watson have a useful unpacking of this question, here is the abstract summarizing their conclusions:

The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.

The NBER paper is here, an ungated version is here (pdf).

Questions that are rarely asked

by on July 28, 2014 at 2:44 am in Economics | Permalink

If monopsony power is an important feature of the labor market, and monopsony power should be prevalent when firms are bigger and therefore have a larger share of the local industry, then why do big firms pay more than small firms? The small mom and pops should be closest to operating in a competitive labor market and have little bargaining power, but they pay less. Maybe the productivity effects of big retailer outweigh the monopsony effect, but that just is another way of saying it’s not as an important feature of the market.

That is from Adam Ozimek.

There is a newly published paper by Paola Profeta, Simona Scabrosetti, and Stanley L. Winer.  The most concrete statement of the argument is that wealth is held disproportionately by the elderly, and they will oppose wealth taxes just as they oppose cuts in Medicare.  And since 1965 wealth taxation has in fact gone down in many Western countries, even though some theoretical arguments may militate in its favor.  The abstract of the paper is this:

We present an empirical model of wealth transfer taxation in the revenue systems of the G7 countries—Canada, France, Germany, Italy, Japan, the UK, and the US—over the period from 1965 to 2009. Our model emphasizes the influences of population aging and of the stock of household wealth in an explanation of the past and likely future of this tax source. Simulations with the model using U.N. demographic projections and projections of household wealth suggest that even in France and Germany where reliance on wealth transfer taxation has been increasing for part of the period studied, wealth transfer taxes can be expected to wither away as population aging deepens over the next two decades. Our results indicate that recent tax designs that rely upon the taxation of wealth transfers to preserve equity in the face of declining taxation of capital incomes may be, in this respect, politically infeasible for the foreseeable future. We conclude by using the case of wealth transfer taxation to raise the general question of the extent to which the consistency of a proposed reform with expected political equilibria ought to play a role in the design of a normative policy blueprint.

An ungated version is here.  For the pointer I thank the excellent Kevin Lewis.

Germany fact of the day

by on July 27, 2014 at 10:31 pm in Current Affairs, Economics, Law | Permalink

…in Germany, the government is rolling out a red carpet by simplifying immigration procedures, funding free language classes, even opening “welcome centers” for newcomers looking to carve out a piece of the German dream.

In the rankings of the globe’s most prosperous countries, this economic powerhouse of 82 million has now leapfrogged Canada, Britain, Italy and Spain to become the largest destination for immigrants after the United States, according to the Paris-based Organization for Economic Cooperation and Development.

The article is here.

In the United States, at least 70 percent of all the food we eat each year passes through a cold chain. By contrast, in China, less than a quarter of the country’s meat supply is slaughtered, transported, stored or sold under refrigeration. The equivalent number for fruit and vegetables is just 5 percent.

The article has other points of interest, an excellent piece by Nicola Twilley.

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower.

…“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

From Anna Bernasek, there is more here.  And background here.

From Free Exchange:

…levelised costs do not take account of the costs of intermittency…

Seven solar plants or four wind farms would thus be needed to produce the same amount of electricity over time as a similar-sized coal-fired plant. And all that extra solar and wind capacity is expensive.

If all the costs and benefits are totted up using Mr Frank’s calculation, solar power is by far the most expensive way of reducing carbon emissions. It costs $189,000 to replace 1MW per year of power from coal. Wind is the next most expensive. Hydropower provides a modest net benefit. But the most cost-effective zero-emission technology is nuclear power. The pattern is similar if 1MW of gas-fired capacity is displaced instead of coal. And all this assumes a carbon price of $50 a tonne. Using actual carbon prices (below $10 in Europe) makes solar and wind look even worse. The carbon price would have to rise to $185 a tonne before solar power shows a net benefit.

There is more here.  The relevant cited studies you can find here.