Economics

I don’t myself care about the event, I just liked the headline.

A related study is here, and I thank CK for the pointer.

That has been the received wisdom, but it is now challenged by a new paper (pdf) by Christina and David Romer:

This paper revisits the aftermath of financial crises in advanced countries in the decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967-2007. The series is based on narrative assessments of the health of countries’ financial systems that were made in real time; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find little support for the conventional wisdom that the output declines following financial crises are uniformly large and long-lasting. Rather, the declines are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself when distress is particularly extreme or continues for an extended period, the aftermath of a crisis is worse.

There is Justin Lahart coverage here, including a contrast with Reinhart and Rogoff.

I remember this question being debated extensively circa 2009-2011, and those who said there was a (limited) role for mismatch unemployment were mocked pretty mercilessly.  Well, Sahin, Song, Topa, and Violante have a piece in the new American Economic Review entitled “Mismatch Unemployment.”  (You can find various versions here.)  It’s pretty thorough and state of the art.  Their conclusion:? “…mismatch, across industries and three-digit occupations, explains at most one-third of the total observed increase in the unemployment rate.”  The people thrown out of work could not be matched as well as the unemployed workers of the past.

Much of the matching problem was for skilled workers, college graduates, and in the Western part of the country.  Geographical mismatch unemployment did not appear to be significant.  Now, “at most one-third” is not the main problem, but it is not small beans either.  That’s a lot of people out of work because of matching problems.

Again, the Great Recession arose from a confluence of supply and demand problems.

Oakley, Mi. is barely a town at 300 people, only one streetlight and, until recently, one police officer. The one cop was good at his job, reports Vocativ’s M.L. Nestel, until he was forced to step down after getting caught stalking a teenage girl.

In 2008, new chief Robert Reznick made some changes: he hired 12 full-time officers and started an enormous volunteer officer program which allowed lawyers, doctors and football players (from other towns) to work toward upholding the law.

One qualifies for this prestigious program simply by paying $1,200 to the police department. In return, you’ll get a uniform, bullet-proof vest and gun. For an additional donation, you’ll get a police badge and the right to carry your gun basically anywhere in the state, including stadiums, bars and daycares.

There is more here, via Larry Rothfield.

It is by Eva Vivalt and is called “How Much Can We Generalize from Impact Evaluations?” (pdf).  The abstract is here:

Impact evaluations aim to predict the future, but they are rooted in particular contexts and results may not generalize across settings. I founded an organization to systematically collect and synthesize impact evaluations results on a wide variety of interventions in development. These data allow me to answer this and other questions across a wide variety of interventions. I examine whether results predict each other and whether variance in results can be explained by program characteristics, such as who is implementing them, where they are being implemented, the scale of the program, and what methods are used.  I find that when regressing an estimate on the hierarchical Bayesian meta-analysis result formed from all other studies on the same intervention-outcome combination, the result is significant with a coefficient  of 0.6-0.7, though the R-squared is very low.  The program implementer is the main source of heterogeneity in results, with government-implemented programs faring worse than and being poorly predicted by the smaller studies typically implemented by academic/NGO research teams, even controlling for sample size.  I then turn to examine specification searching and publication bias, issues which could affect generalizability and are also important for research credibility.  I demonstrate that these biases are quite small; nevertheless, to address them, I discuss a mathematical correction that could be applied before showing that randomized control trials (RCTs) are less prone to this type of bias and exploiting them as a robustness check.

Eva is on the job market from Berkeley this year, her home page is here.  Here is her paper “Peacekeepers Help, Governments Hinder” (pdf).  Here is her extended bio.

That is the new Foreign Affairs piece by Andrei Shleifer and Daniel Treisman, and they argue that matters have gone strikingly well and are relatively normal.  Here is one excerpt:

Newspapers overflowed with accounts of soaring mortality amid the stress of transition. On average, however, life expectancy rose from 69 years in 1990 to 73 years in 2012. The speed of improvement was two thirds faster than in the communist 1980s. Russia’s life expectancy today, at 70.5, is higher than it has ever been. Infant mortality, already low, fell faster in percentage terms than in any other world region.

Eastern Europe is infamous for unhealthy binge drinking. However, average alcohol consumption fell between 1990 and 2010 from 7.9 to 7.6 liters of pure alcohol a year per resident aged over 14. There were exceptions — drinking rose in Russia and the Baltic states but even in Russia recorded consumption in 2010, 11.1 liters, was lower than that in Germany, France, Ireland, or Austria. (Of course, more drinking might escape the statisticians in the Slavic region.) Smoking among adult males was high – 42 percent on average but about the same as in Asia. In short almost all statistics suggest a dramatic improvement in the quality of life.

In short, almost all statistics suggest a dramatic improvement in the quality of life since 1989 for citizens of the average postcommunist country — an improvement that rivals and often exceeds those in other parts of the world.

You will note that the published version in Foreign Affairs has slightly different wording and organization.

Good sentences

by on October 29, 2014 at 3:25 pm in Economics, History, Science | Permalink

To develop an intuition for our main result, note that the equilibrium private saving behavior must be resistant to rare mutants.

That is from the new Robson and Szentes AER paper, “Biology and Social Discounting,” which argues that the nature of sexual reproduction causes private discount rates to rise above social ones.

Some Good News on Patents

by on October 29, 2014 at 12:45 pm in Economics, Law | Permalink

Further evidence of a dramatic slowdown in patent litigation activity in the United States is provided today in data published by Unified Patents, the entity whose business is based on helping SMEs fight frivolous patent suits. According to the research, which covers the third quarter of this year (June to September),  there was a 23% drop in the number of suits filed compared to the second quarter, and a 27% year-on-year reduction.

The findings come just weeks after data released by Lex Machina showed that there had been a 40% fall in patent suits in September 2014 as compared to the same month in the previous year. Commenting to IAM on the reasons for the decline, Lex Machina founder Professor Mark Lemley claimed that much of it could be attributed to the Supreme Court’s Alice v CLS decision. The Alice judgment was handed down towards the end of June.

More here.

Alice has made a difference as well as the cheaper post-grant challenge procedure in the AIA. Once the first software patents make it through, however, there will be an uptick as people learn the new system. Still this is good news especially for software patents but we have a way to go on the larger issue of IP, including copyright.

Here is the updated “Tabarrok curve“.

Tabarrok Curve

Paul Krugman argues the contrary here.  But let’s say there was a supply slowdown starting in 1999 or so, as reflected in wage and jobs data, masked a bit by the real estate bubble of 2004-2006 and with some of the productivity figures inflated for domestic purposes due to outsourcing.

If there is less produced, there are eventually perceived negative wealth effects.  What happens to demand?  It goes down, in this case with a lag because of credit.  Yes, it is a big mistake to assume Say’s Law always holds but it is an even bigger mistake to think it never holds.  Supply slowdowns are bad for demand, and they likely are bad for credit creation too, which hurts demand further yet.

There is no contradiction in a model where both aggregate demand and aggregate supply curves shift in unfavorable directions!  And in the medium run, each of these shifts pushes the other curve around too.

Let’s not forget that economies have real wage and price stickiness in addition to nominal stickiness.  That is another channel through which negative supply shocks can hurt aggregate demand and throw people out of work.

Krugman is worried about policy implications:

If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).

It’s not either/or.  Circa 2008-2009, we should have had a higher inflation or ngdp target.  We could do structural reform too, whatever you might think that means, obviously opinions will differ.  We could build productive infrastructure, boosting both supply and demand, and with little risk of default on the debt.  And yes, we might wish to cut some other government expenditures in the process (farm subsidies anyone?), with looser money to pick up the slack.  What we shouldn’t do is all that Keynesian ditch digging.  Even if you agree with the argument for it (and I don’t), it so hurts the reputation of legitimate government investment that we shouldn’t be going near it.  There are many, many other better things to do, including giving our government a reputation for careful project selection looking forward.

Simple textbook economics indicates that the AD-AS distinction makes the most sense in the short run.  Of course hysteresis is a mechanism by which low AD can over time translate into low AS as well, but the causation runs both ways, don’t forget that.

That is a new suggestion made by Alwyn Young in the latest American Economic Review.

The cost disease argument suggests that some services do not augment their productivity very readily (e.g., the barber), and furthermore the demand for many services is income elastic and price inelastic, so with economic growth services take up a rising percentage of gdp over time.  The relative cost of producing service output rises.  And since services are more sluggish in productivity, and being weighted more heavily in output, we can expect economy-wide productivity rates to decline.

Young’s argument is to draw out the implications of the heterogeneity of workers.  Let’s say that a worker’s skill in one sector is only loosely correlated with his skill in some other sector.  That will mean when individual workers have comparative advantage in a sector, they also are likely to have absolute advantage in that same sector.  The typist really is a better typist than the lawyer.

Now let’s go back to the services sector.  It expands over time and sucks in labor by offering higher relative wages.  That draws in more individuals with low comparative and also low absolute advantage in that sector.  More concretely, the system ends up pulling in a lot of losers into law and medicine, while we are left with only the very best factory workers still on the job.  Or think of all those mediocrities who flooded into punk rock in the early 1980s.  It’s a bit like a Peter Principle.

The services sector will appear less efficient, but what is called “underlying true levels of productivity growth” — taking into account the average efficacies of the workers present in the two sectors — might not be changing much at all.  In other words, a quite different mechanism can generate the same observation as Baumol’s cost disease.

The paper presents plenty of industry-level evidence that this declining efficacy of service workers is indeed the case.

An ungated version of the paper is here, the published, gated version is here.

Most secessionist movements want independence. But a small group in Sardinia, the beautiful island off Italy’s coast has another idea for secession.

sardinie2Angered by a system they say has squandered economic potential and disenfranchised the ordinary citizen, they have had enough. They want Rome to sell their island to the Swiss.

“People laugh when we say we should go to become part of Switzerland. That’s to be expected,” said Andrea Caruso, co-founder of the Canton Marittimo (Maritime Canton) movement.

While many have dismissed the proposal as a joke, its supporters insist they are serious. “The madness does not lie in putting forward this kind of suggestion,” said Caruso. “The madness lies in how things are now.”

The Sardinians are not mad. As with Charter Cities the idea is that if you can’t move to good rules then have the good rules move to you. Charter city proponents, however, are focused on relatively uninhabited areas to avoid political problems but the Sardinians are inviting new rules and rulers. In the United States, firms can choose which state to incorporate in and thus which of 50 packages of laws will govern the relations between their shareholders and managers. Why not let cities, states and regions adopt wholesale a package of laws that will govern them? Competitive federalism on a world scale.

 Sicily, for instance, employs 28,000 forestry police — more than Canada — and has 950 ambulance drivers who have no ambulances to drive.

More here on the general state of decline in Italy.

Libby Nelson reports:

It’s common to hear that teachers should be paid better — more like doctors and lawyers. In 2009, the Equity Project, a charter school in New York decided to try it: they would pay all their teachers $125,000 per year with the possibility of an additional bonus.

The typical teacher in New York with five years’ experience makes between $64,000 and $76,000. The charter school, known as TEP, would pay much more. But in exchange, teachers, who are not unionized, would accept additional responsibilities, and the school would keep a close eye on their work.

Four years later, students at TEP score better on state tests than similar students elsewhere. The differences were particularly pronounced in math, according to a new study from Mathematica Policy Research. (The study was funded by the Gates Foundation.) After four years at the school, students had learned as much math as they would have in 5.6 years elsewhere…

The gains erased 78 percent of the achievement gap between Hispanic students and whites in the eighth grade.

…The $125,000 number was eye-catching, but it was just the start of the school’s approach to teaching. Teachers were also eligible for a bonus of between 7 to 12 percent of their salary. The teachers, who are not unionized, went through a rigorous selection process that included a daylong “audition” based on their teaching skills. The typical teacher already had six years of classroom experience before they were hired.

Teachers at TEP also get more time to collaborate and played a bigger role in school decision-making than teachers in other jobs. Teachers were paired up to observe each others’ lessons and provide feedback, collaboration that experts agree is important but happens too infrequently. During a six-week summer training, teachers also helped set school policy.

There is more hereAddendum: Do read the comments, there are some excellent points in there.

Loren Adler and Adam Rosenberg report:

…the disproportionate role played by prescription drug spending (or Part D) has seemingly escaped notice. Despite constituting barely more than 10 percent of Medicare spending, our analysis shows that Part D has accounted for over 60 percent of the slowdown in Medicare benefits since 2011 (beyond the sequestration contained in the 2011 Budget Control Act).

Through April of this year, the last time the Congressional Budget Office (CBO) released detailed estimates of Medicare spending, CBO has lowered its projections of total spending on Medicare benefits from 2012 through 2021 by $370 billion, excluding sequestration savings. The $225 billion of that decline accounted for by Part D represents an astounding 24 percent of Part D spending. (By starting in 2011, this analysis excludes the direct impact of various spending reductions in the Affordable Care Act (ACA), although it could still reflect some ACA savings to the extent that the Medicare reforms have controlled costs better than originally anticipated.) Additionally, sequestration is responsible for $75 billion of reduced spending, and increased recoveries of improper payments amount to $85 billion, bringing the total ten-year Medicare savings to $530 billion.

The full piece is here, via Arnold Kling.

So says one new paper on PubMed, by de Ridder D, Kroese F, Adriaanse M, Evers C.:

Three experimental studies examined the counterintuitive hypothesis that hunger improves strategic decision making, arguing that people in a hot state are better able to make favorable decisions involving uncertain outcomes. Studies 1 and 2 demonstrated that participants with more hunger or greater appetite made more advantageous choices in the Iowa Gambling Task compared to sated participants or participants with a smaller appetite. Study 3 revealed that hungry participants were better able to appreciate future big rewards in a delay discounting task; and that, in spite of their perception of increased rewarding value of both food and monetary objects, hungry participants were not more inclined to take risks to get the object of their desire. Together, these studies for the first time provide evidence that hot states improve decision making under uncertain conditions, challenging the conventional conception of the detrimental role of impulsivity in decision making.

The link is here, via Neuroskeptic.  Also from his Twitter feed we learn that rats may be Bayesians.

Via Samir Varma, here is a piece on whether Tylenol can ease the pain of decision-making, I say probably not.