History

Mysteries of growth

by on April 11, 2012 at 11:55 am in Economics, History, Uncategorized | Permalink

Matt writes:

To me the most pointed contrast is between the Soviet Bloc and pre-reform China. Why was East Germany so much poorer than West Germany? That’s easy—Communism! And that’s why North Korea is poorer than South Korea. It’s also why Taiwan is richer than China. But Communism hardly explains why the Soviet Union was always much richer than China. But it was a lot richer despite broadly similar political systems and ideological commitments, and the human suffering involved in the PRC’s failure to implement Communism as successfully as the USSR was enormous.

I would say this: Stalin favored industrialization (albeit of a strange sort) more than did the Chinese communists, China had a more damaging heritage of conquest and civil war, Russia was far more urbanized, Russia had greater access to European ideas (some of them bad of course), and the Russian experience of nation-building was mostly behind them, whereas China is still going through this process.  For Russia/Soviet Union, the major structures of 20th century European growth were largely in place, though “liberal institutions” were rejected.  Russia had an advanced European educational system in place, albeit not for everyone.  If you look at the economic history of the more Asiatic “Stans,” which of course were part of the Soviet Union communist experience, the importance of already-industrializing and European connections looks all the more stronger.  The relative prosperity of Estonia also bears out this thesis, though it would be interesting to ponder Kaliningrad/Königsberg in this regard.

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The Fortune 500 of 1812

by on April 11, 2012 at 11:05 am in History | Permalink

Banks dominate the list.

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Indian education under the British empire

by on April 10, 2012 at 5:34 am in Education, History | Permalink

It turns out it was worse than I had thought.  I’ve been reading some papers by Latika Chaudhary on this topic, and I learned that educational expenditures in India, under the British empire, never exceeded one percent of gdp.  To put that in perspective, for 1860-1912 in per capita terms the independent “Princely states” were spending about twice as much on education as India under the British.  Mexico and Brazil, hardly marvels of successful education, were spending about five times as much.  Other parts of the British empire, again per capita, were spending about eighteen times as much.

Obviously, there is a “small number of British just couldn’t reach those hundreds of millions of Indians in the countryside” effect going on here.  Still, from what I am seeing education simply was not much of a priority.  There was some ruling, some building of infrastructure, and some resource extraction going on.  Education ended up as a side show, and ultimately the gears of empire were attuned toward self-maintenance and that meant only a minimal emphasis on education.

Primary schools were especially weak, as was education for girls, no surprise on either count.  In per capita terms, spending on education in Bombay was ten times higher than in Orissa.

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Revised TFP growth for Singapore looks much better

by on April 9, 2012 at 2:16 pm in Data Source, Economics, History | Permalink

From Chang-Tai Hsieh, plucked out of the 2002 AER, via @dtimesd:

This paper presents dual estimates of total factor productivity growth (TFPG) for East Asian countries. While the dual estimates of TFPG for Korea and Hong Kong are similar to the primal estimates, they exceed the primal estimates by 1 percent a year for Taiwan and by more than 2 percent for Singapore. The reason for the large discrepancy for Singapore is because the return to capital has remained constant, despite the high rate of capital accumulation indicated by Singapore’s national accounts. This discrepancy is not explained by financial market controls, capital income taxes, risk premium changes, and public investment subsidies.

The initial context is given here.  Via Dave Backus, here is another relevant paper.

Addendum: Scott Sumner adds comment.

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What happened to Alywn Young’s Hong Kong vs. Singapore contrast?

by on April 8, 2012 at 8:37 am in Economics, Education, History, Science | Permalink

From 1992, the paper is here (note by the way an interesting written comment from Paul Krugman at the end).  The basic story was that Hong Kong and Singapore had obtained their prosperity by two different paths.  Hong Kong had made real productivity gains, but Singapore grew just by throwing more factors of production at the problem of economic growth, including a massive dose of savings and investment, including foreign investment.  The share of investment in Singapore’s gdp rose from 9% in 1960 to 43% in 1984, while Hong Kong’s remained roughly steady at about 20%.  If you back this out from national income statistics, you can measure that Singapore had very low levels of total factor productivity growth.

But should we believe that story, which by now is twenty years old?  After all, these days, Singapore is extremely interested in cutting-edge science and on the frontier in the biosciences and with satellite launches, among other areas.  Hong Kong has done fine, but as a finance center and entrepot for the China trade.  Not many people look to them as ideas leaders.  Maybe both countries somehow turned on the proverbial dime, but I don’t believe the initial Young result for a few reasons:

1. Ever since Michael Mandel, I am skeptical about backing out productivity claims from “value-added” data for extremely open economies.  The quality of the data do not support extremely strong claims, and Krugman stresses this point in his comment.  By the way, in the Singapore data TFP growth is negative in some sub-periods; see pp.24-5, can you believe -8% for 1970-1990?  I take this as indicative of problems in the data and I am not persuaded by Young’s suggestion that it results from cyclical factors.

2. There is much talk about Singapore bringing in so much capital, and they did.  But getting all that capital is not as simple as throwing a switch.  Presumably the capital — especially the foreign capital — comes in part because investors expect a favorable productivity environment, if only prospectively.

3. Sometimes capital can “carry” or “contain” TFP growth; imagine spending money on a new industrial robot.

4. Some of the measured “TFP growth” may in fact reflect underpriced labor, including underpriced labor migrating from the PRC into Hong Kong.  Those workers turned out to be more productive than people were expecting, which creates an apparent TFP residual, and migration of this nature played a larger role in the Hong Kong economy than in Singapore.

5. Young’s measures make him sound skeptical about the future (post-1992) course of economic growth in Singapore, and this has hardly been borne out by the facts.  I wouldn’t call this an explicit or formal prediction of his theory but read the paper and the pessimism seeps through, albeit subtly.  Is this passage (p.32) prescient or a sign of a mistaken assessment?:

Although I have presented evidence earlier, on the remarkable rate of structural transformation of the Singaporean economy, I feel that the words of Goh Keng Swee, Singapore’s Minister of Finance, in March 1970 are equally compelling: “. .. the electronics components we make in Singapore require less skill than that required by barbers or cooks, involving mostly repetitive manual operations.” By 1983 Singapore was the world’s largest exporter of disk drives. By the late 1980s, Singapore was one of Asia’s leading financial centers. As of today, the Singaporean government is targeting biotechnology and, no doubt, with its deep pockets, will achieve “success” in this sector. One cannot help but sense that this is industrial targeting taken to excess.

To flesh out this history, note two further points:

1. Young is long renowned for the care and quality of his empirical work.  He is the sort of researcher who might obsess for six months over a footnote.  That is one reason why he has not produced a greater number of papers.

2. This line of research (there are other papers here) was immediately hailed as successful upon its appearance.  I read it too at the time and simply assumed it was likely to be true.  Even Krugman, despite his insightful worries in his comment, ended up endorsing the Singapore result as true (that link is also an excellent essay for background on this entire set of ideas and debates).

The funny thing is, Young’s hypothesis still could be true.  It hasn’t been refuted.

But if you ask me — I don’t believe it, not any more.  I take this to be a cautionary tale of how difficult it can be to establish firm knowledge through economics.

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*Mirror, Mirror* (paging Leo Strauss)

by on April 2, 2012 at 6:20 pm in Film, History | Permalink

Not often does Hollywood put out movies romanticizing tyrannicide and the assassination of foreign leaders of friendly countries, in this case India.  Julia Roberts is the wicked Queen, witch, and false pretender, but actually the stand-in for Indira Gandhi, with an uncanny resemblance of look and dress in the final scene (I wonder if anyone told her?).  This movie presents a romanticized and idealized version of how her assassination should have proceeded and should have been processed, namely in a triumphal manner with no reprisals but rather celebration and joyous union and love.  As the plot proceeds, you will find all sorts of markers of Sikh theology, including numerous references to daggers, hair, mirrors, water, immersions, submersions, bodily penetrations, transformations, the temple at Amritsar, dwarves who enlarge themselves, and the notion of woman as princess, among many others; director Tarsem Singh knows this material better than I do (read up on Sikh theology before you go, if you haven’t already).  The silly critics complained that the plot didn’t make sense, but from the half dozen or so reviews I read they didn’t even begin to understand the movie.

Without wishing to take sides on either the politics or the religion, I found this a daring and remarkable film.  The sad thing is that no one is paying attention.

The movie’s trailer is here.

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Matthew Bishop’s new book

by on March 30, 2012 at 12:46 pm in Books, Economics, History | Permalink

With Michael Green, In Gold We Trust: The Future of Money in an Age of Uncertainty, Kindle Single.  Here is a short video about the book.

From the authors:

It provides a lively analysis of the big economic questions currently facing America, such as the danger to the dollar posed by gridlock in DC, especially over deficit reduction, the euro crisis, the growing risk of inflation and the changing attitude of China towards America. We argue that the renaissance of gold, plus the development of virtual currencies such as Bitcoin, reflect weaknesses in the technology of money that we all need to take seriously and try to fix.

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*The Clash of Economic Ideas*

by on March 26, 2012 at 2:27 am in Books, Economics, History, Uncategorized | Permalink

In 1958, on his first visit to India, the Hungarian-British development economist Peter Bauer was eager to meet the Indian economist B.R. Shenoy.  Bauer knew the name from a “Note of Dissent on the Memorandum of the Economists’ Panel,” which Shenoy had written criticizing India’s Second five-Year Plan.  In 1955 the Indian government had recruited twenty-one senior Indian economists for the Panel of Economists, chaired by the minister of finance, to review the plan.  Twenty of the economists had signed a memorandum endorsing the plan.  Professor Shenoy was the lone dissenter  Shenoy’s “Note of Dissent” was an annoyance to members of the Indian Planning Commission; to Prime Minister Nehru, who had initiated the planning effort; to Nehru’s adviser P.C. Mahalanobis, who had drafted the plan; and even to international aid officials, who overwhelmingly supported the planning effort.  Shenoy had become persona non grata in official economic policy-making circles.

Yet Shenoy turned out largely to be right.

That is from the forthcoming excellent book by Lawrence H. White, Amazon link here.  The book is not mostly about India, but it is about the role of economic ideas in shaping economic outcomes.  The chapter on India is my favorite, however, and it is perhaps the very best place to start to understand the failures of India’s planning period.

White also points our attention to Milton Friedman’s 1955 Memorandum to the Indian Government, which is I believe not well known, not even among Friedman fans.

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Corruption and the history of development economics

by on March 23, 2012 at 12:51 pm in Economics, History, Uncategorized | Permalink

A few observations, based on some recent reading:

1. It is remarkable how little the topic is discussed in the mainstream literature before the 1990s.  Gunnar Myrdal to his credit does discuss it a bit in his Asian Drama.

2. I have seen more than a few articles suggesting Anne Krueger showed that rent-seeking accounted for 7.3 percent of Turkish gdp (in the 1960s).  That’s not what Krueger said.  Rather she showed that import licenses were equivalent to this value, and that this provided an upper bound for the amount of rent-seeking.

3. The real costs of rent-seeking and corruption are the “limits to technology transfer” argument of Parente and Prescott, not the standard rent-seeking box.  That paper alone could bring a Nobel Prize, and yet it’s hardly ever mentioned in assessments of Prescott.

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James Stock and Mark Watson on the Great Recession

by on March 23, 2012 at 3:38 am in Economics, History | Permalink

Binyamin Applebaum summarizes their new paper:

The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon.

The authors argue that the slow pace of recovery reflects a long-term deterioration in economic prospects. Specifically, they estimate that the trend growth rate of gross domestic product fell by 1.2 percentage points between 1965 and 2005.

…the key reason for the faltering pace of growth is that the work force is expanding more slowly. Population growth has slowed, and so has the pace at which women are entering the labor market.

“These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case.”

Indeed, recent growth has actually outpaced their expectations.

“The current recovery in employment is actually faster than predicted,” they write. “The puzzle, if there is one, is why the recovery was as strong as it has been.”

This general theory about the power of women has been propounded before, notably by the economist Tyler Cowen in his recent book “The Great Stagnation.”

The paper itself can be found here (pdf). By the way, for market monetarists, equity markets seem to agree.  Stock and Watson, of course, are two of the most technically accomplished macroeconometricians.  This is further evidence — perhaps the most thorough empirical paper on the topic to date — that the Great Recession has been about the interaction of cyclical and structural forces.

Other interesting papers from that symposium are here, including a DeLong-Summers defense of stimulus as possibly self-financing.

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Will Arab Spring lead to democracy?

by on March 23, 2012 at 2:03 am in History, Political Science, Religion, Uncategorized | Permalink

A new BPEA paper by Eric Chaney (pdf) suggests maybe not:

Will the Arab Spring lead to long-lasting democratic change? To explore this question I examine the determinants of the Arab world’s democratic defi…cit in 2010. I …find that the percent of a country’s landmass that was conquered by Arab armies following the death of the prophet Muhammad statistically accounts for this defi…cit. Using history as a guide, I hypothesize that this pattern reflects the long-run influence of control structures developed under Islamic empires in the pre-modern era and …and that the available evidence is consistent with this interpretation. I also investigate the determinants of the recent uprisings. When taken in unison, the results cast doubt on claims that the Arab-Israeli conflict or Arab/Muslim culture are systematic obstacles to democratic change in the region and point instead to the legacy of the region’s historical institutional framework.

Here is a good sentence:

…the fact that the Arab world’s democratic defi…cit is shared by 10 non-Arab countries that were conquered by Arab armies casts doubt on the importance of the role of Arab culture in perpetuating the democratic defi…cit.

And this:

Once one accounts for the 28 countries conquered by Arab armies, the evolution of democracy in the remaining 15
Muslim-majority countries since 1960 largely mirrors that of the rest of the developing world.

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Claude Shannon and juggling

by on March 22, 2012 at 12:38 pm in Books, Games, History, Science | Permalink

As he turned away from academic pursuits, Shannon also focused on inviting aspects: It was a game, a problem, a puzzle.  It produced motions he considered beautiful.  And it was something he simply could not master, making it all the more tantalizing.  Shannon would often lament that he had small hands, and thus had great difficulty making the jump from four balls to five — a demarcation, some might argue, between a good juggler and a great juggler.  Old friends — fellow jugglers from the Bell Labs days — wrote encouraging letters suggesting he was closer to five balls than he realized.  It’s likely Shannon never quite achieved that.  Nevertheless, in the late 1970s he found himself consumed by the question of whether he could formulate a scientific theory of juggling to explain its unifying principles.  Just as he had done years before — for his papers on cryptography, information, and computer chess — he delved into the history of juggling and took stock of its greatest practitioners.

That is from Jon Gertner’s The Idea Factory: Bell Labs and the Great Age of American Innovation.  Here is my previous post on the book, which I recommend highly.

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More on the time-dependence of fiscal policy

by on March 20, 2012 at 2:18 pm in Economics, History | Permalink

Chris Reicher has a new paper (pdf) and the abstract is here:

This paper documents the systematic response of postwar U.S. fiscal policy to fiscal imbalances and the business cycle using a multivariate Fiscal Taylor Rule. Adjustments to taxes and purchases both account for a large portion of the fiscal response to debt, while authorities seem reluctant to adjust transfers. As expected, taxes are highly procyclical; purchases are acyclical; and transfers are countercyclical. Neither pattern has changed much over time, except that adjustment happens more slowly after 1981 than before 1980. The role of adjustments to purchases in stabilizing the debt indicates that the recent discussion about spending reversals is highly relevant.

The gated, published version is here.  Chris writes me in an email:

Germany uses a similar mix of spending restraint vs. tax increases as the United States in order to consolidate its fiscal position over time.  My 2012 article basically corroborates Bohn’s results using different techniques for the postwar period.  I have a set of unpublished estimates which indicates the same thing for Germany and a number of other countries–adjustments to real spending and taxes both account for large portions of fiscal authorities’ endogenous response to debt.

Chris points me to a further paper on the topic, forthcoming in ReStat.

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*The Idea Factory*

by on March 19, 2012 at 7:36 am in Books, History, Science | Permalink

I loved this book and devoured it in a single sitting.  The author is Jon Gertner and the subtitle is Bell Labs and the Great Age of American Innovation.  Here is one excerpt:

Scientists who worked on radar often quipped that radar won the war, whereas the atomic bomb merely ended it.  This was not a minority view.  The complexity of the military’s radar project ultimately rivaled that of the Manhattan Project, but with several exceptions.  Notably, radar was a far larger investment on the part of the U.S. government, probably amounting to $3 billion as contrasted with $2 billion for the atomic bomb.  In addition, radar wasn’t a single kind of device but multiple devices — there were dozens of different models — employing a similar technology that could be used on the ground, on water, or in the air.

One lesson of this book is how much war can spur innovation.  Here is one Gertner article on the themes of the book.  Here is a review of the book.  Anyone interested in the history of science, tech, or innovation should buy and read this book.

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Temporary vs. permanent increases in government spending

by on March 18, 2012 at 4:04 pm in Economics, History, Political Science, Uncategorized | Permalink

Not long ago Paul Krugman wrote:

To a first approximation, in other words, the effect of current fiscal policy — whether stimulus or austerity — an [on?] the actions of future governments is zero.

He makes further points at the link, although there is not a citation to the literature.  I thought we should look at the evidence a little more closely.  Some of it contradicts Krugman as read literally, though it is not all bad news for his larger point.

Here is an abstract from Brian Goff:

In spite of Peacock and Wiseman’s 1961 NBER study demonstrating the “displacement effect”, simplistic theoretical and empirical distinctions between temporary and permanent spending are common. In this paper, impulse response functions from ARMA models as well as Cochrane’s non-parametric method support Peacock and Wiseman’s conclusion by showing 1) government spending in the aggregate displays strong persistence to temporary shocks, 2) simple decomposition methods intended to yield a “temporary” spending series have a weak statistical foundation, and 3) persistence in spending has increased during this century. Also, as a basic “fact” of government spending behavior, the displacement effect lends support to interest group and bureaucracy models of government spending growth.

There is persistence to spending, although this study does not create a category for stimulus spending per se, however that concept might be defined.  The work of Robert Higgs also provides a clear look at ratchet effects on government spending, control, and regulation, although Higgs focuses on war rather than spending.  State governments also seem to exhibit a ratchet effect, whereby good times bring about permanently higher budgetary demands, if only through endowment effects, lock-in, and status quo bias.

That said, the federal debt/gdp ratio seems to show mean reversion, as does the measure of primary surplus.  That would mean that fiscally troubled situations are followed by improvements, though not necessarily from spending decreases.  In fact there has been  considerable reliance on a “growth dividend.”  And here is Henning Bohn from the QJE:

How do governments react to the accumulation of debt? Do they take corrective measures, or do they let the debt grow? Whereas standard time series tests cannot reject a unit root in the U. S. debt-GDP ratio, this paper provides evidence of corrective action: the U. S. primary surplus is an increasing function of the debt-GDP ratio. The debt-GDP ratio displays mean-reversion if one controls for war-time spending and for cyclical fluctuations. The positive response of the primary surplus to changes in debt also shows that U. S. fiscal policy is satisfying an intertemporal budget constraint.

In other words, we make up for first-temporary-then-permanent spending boosts by a mix of growth and higher taxes.  Krugman might well be happy with that scenario, but the data do show intertemporal interdependence for budgetary decisions, with a mix of persistence on one variable (spending) and mean-reversion on another (debt-gdp ratio).  And if you think a lot of government spending is inefficient, you should still be troubled by apparently “temporary” spending bursts.

As with much of macroeconomics, I would apply a good dose of agnosticism to these results (noting that agnosticism is not the same as assuming zero effect), but still the correlations are consistent with my intuitions more generally.

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