Alesina and co-authors respond on European fiscal austerity

They have a new NBER working paper on this topic, here is one key part of the abstract:

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

They also consider, and cannot reject, the possibility that the output declines of recent times were due to additional negative variables, such as credit crunches, rather than higher values for the fiscal multiplier.

I predict this paper will be ignored rather than responded to.  For a while now it has been the practice to criticize “austerity” rather than to disaggregate the policies, or describe them with greater specificity, even though that is easy to do.  And it is incorrect to describe this paper as defending austerity, rather I read it as being anti-tax hike, and suggesting that “austerity” is not a very useful concept.

There is an ungated version of the paper here.

What should I ask Nathan Nunn?

I will be doing a Conversation with him, he is an economist at Harvard, you could call much of his work economic history and economic development.  Wikipedia notes:

A recurrent theme in Nunn’s research is the long-term impact of historical processes on economic development, often mediated through institutions, culture, knowledge and technology.

Key findings of his research include the following:

  • Countries’ ability to enforce contracts is possibly a more important determinant of their comparative advantage than skilled labour and physical capital combined.
  • A substantial part of Africa’s current underdevelopment appears to be caused by the long-term effects of the Atlantic and Arab slave trades.
  • Current differences in trust levels within Africa are attributable to the impact of the Atlantic and Arab slave trades, which have caused the emergence of low-trust cultural norms, beliefs, and values in ethnic groups heavily affected by slavery (with Leonard Wantchekon).
  • By impeding not only trade and technological diffusion but also the depredations of slave traders, the ruggedness of certain African regions’ terrain had a significant positive impact on these regions’ development (with Diego Puga).
  • The introduction of the potato within the Columbian exchange may have been responsible for at least a quarter of the population and urbanisation growth observed in the Old World between 1700 and 1900 (with Nancy Qian).
  • In line with Boserup’s hypothesis, the introduction and historical use of plough agriculture appears to have given men a comparative advantage and made gender norms less equal, with historical differences in the plough use of immigrants’ ancestral communities predicting their attitudes regarding gender equality (with Alberto Alesina and Paolo Giuliano).
  • U.S. Food Aid is driven by U.S. objectives and can lead to increased conflict in recipient countries (with Nancy Qian).

So what should I ask him?

Social Planners Do Not Exist

Enrico Spolaore on his friend, co-author, and mentor Alberto Alesina:

I first met Alberto thirty years ago at Harvard, where he had received his Ph.D. in Economics in 1986, and had returned as faculty, after a couple of years at Carnegie-Mellon. He was already deservedly famous. In 1988, The Economist had presciently picked him as one of the decade’s eight best young economists, as he was transforming the way we approach macroeconomics and economic policy by explicitly bringing politics into the analysis. In his influential contribution to the NBER Macroeconomics Annual 1988, he had forcefully stated that “social planners do not exist.” Economists should not just assume that governments would implement optimal policies (presumably following the economists’ own  recommendations). Instead, we should strive to understand actual policies as resulting from the strategic interactions of partisan politicians with each other and with the public, and often leading to socially inefficient outcomes.

Exactly right. Alesina was one of the most important scholars extending and integrating public choice, especially to macroeconomic questions.

Wednesday assorted links

Monday assorted links

1. The rage of research.

2. Summers on Alesina.

3. China-India thread.

4. “Historically, immigrant men were more likely to be employed than native men. The COVID-related labor market disruptions eliminated the immigrant employment advantage. By April 2020, immigrant men had lower employment rates than native men.”  Link here.

5. Further evidence that violent media content lowers violence.

6. “…the more infectious people believe that COVID-19 is, the less willing they are to take social distancing measures, a finding we dub the “fatalism effect”.

7. “Formula E driver Daniel Abt was disqualified and ordered to pay £8,900 to charity for getting a professional gamer to compete under his name in an official esports race.

8. What the development of penicillin tells us about coronavirus vaccines.  The piece makes several interesting points about speed.

Sunday assorted links

Trump understands this, perhaps you do not

Given the very negative baseline views that respondents have of immigrants, simply making them think about immigration in a randomized manner makes them support less redistribution, including actual donations to charities.

That is from research by Alesina, Miano, and Stantcheva.  And don’t forget this:

We also experimentally show respondents information about the true i) number, ii) origin, and iii) “hard work” of immigrants in their country. On its own, information on the “hard work” of immigrants generates more support for redistribution. However, if people are also prompted to think in detail about immigrants’ characteristics, then none of these favorable information treatments manages to counteract their negative priors that generate lower support for redistribution.

Nation-building, nationalism, and wars

That is the new NBER working paper by Alberto Alesina, Bryony Reich, Alessandro Riboni, here is the abstract:

The increase in army size observed in early modern times changed the way states conducted wars. Starting in the late 18th century, states switched from mercenaries to a mass army by conscription. In order for the population to accept to fight and endure war, the government elites began to provide public goods, reduced rent extraction and adopted policies to homogenize the population with nation-building. This paper explores a variety of ways in which nation-building can be implemented and studies its effects as a function of technological innovation in warfare.

That is related to some recent work by Ferejohn and Rosenbluth.

Which kind of countercyclical fiscal policy is best?

Miguel Faria-e-Castro, on the job market from NYU, has a very interesting paper on that question.  Here are his findings:

What is the impact of an extra dollar of government spending during a financial crisis? How important was fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data on the fiscal policy response to assess its role during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would had been 1/3 worse in the absence of fiscal interventions; (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers; and (iii) bank recapitalizations were closest to generating a Pareto improvement.

Bank recapitalizations — just remember that the next time you hear someone talking about “G” in the abstract.

See also this new Alesina NBER paper, indicating that the how of fiscal adjustment is much more important than the when.  No tax hikes!

Does Diversity Reduce Freedom or Growth?

The founding father of Singapore, Lee Kuan Yew, credits ‘social discipline’ for the phenomenal economic rise of his country (Sen, 1999). Countries such as Singapore apparently demonstrate that autocratic measures are probably necessary, particularly in culturally fractionalized societies for creating the social stability necessary for economic growth (Colletta et al., 2001). Such thinking informs the so-called “Asian model” (Diamond, 2008).1 Recent studies, particularly in economics, support the logic (Alesina et al., 2006 and Easterly et al., 2006). According to these scholars, the more congruent territorial borders are with nationality, the better the chances for good economic policy to appear endogenously from within these societies because social cohesion determines good institutions and policies for development (Banerjee et al., 2005 and Easterly, 2006b). This paper addresses the question of whether or not social diversity hampers the adoption of sound economic policies, including institutions that promote property rights and the rule of law. We also examine whether democracy conditions diversity’s effect on sound economic management, defined as economic freedom, because the index of economic freedom is strongly associated with higher growth and is endorsed by proponents of the ‘diversity deficit’ argument (Easterly, 2006a).2

…Using several measures of diversity, we find that higher levels of ethno-linguistic and cultural fractionalization are conditioned positively on higher economic growth by an index of economic freedom, which is often heralded as a good measure of sound economic management. High diversity in turn is associated with higher levels of economic freedom. We do not find any evidence to suggest that high diversity hampers change towards greater economic freedom and institutions supporting liberal policies.

Paper here. The data is a panel from 116 countries covering 1980–2012 so this doesn’t rule out a negative long-run effect but it is prima facie evidence that diversity need not reduce freedom or growth.

Monday assorted links

1. English departments are better than you think.

2. Angus Deaton on stuff, including what TV he watches (good taste).

3. More Alesina, on fiscal adjustments.

4. The Iranian film “About Elly” is one of the best movies to come out this year.  It is by the director of “A Separation,” and it will take you forty-five minutes to start realizing how good it is.

5. Michael Specter CRISPR article from The New Yorker, very interesting, more than just the usual.

Does immigration undermine public support for social policy?

Mostly not.  Again, Kevin Lewis points us to a fascinating paper:

Does Immigration Undermine Public Support for Social Policy?

David Brady & Ryan Finnigan
American Sociological Review, February 2014, Pages 17-42

There has been great interest in the relationship between immigration and the welfare state in recent years, and particularly since Alesina and Glaeser’s (2004) influential work. Following literatures on solidarity and fractionalization, race in the U.S. welfare state, and anti-immigrant sentiments, many contend that immigration undermines public support for social policy. This study analyzes three measures of immigration and six welfare attitudes using 1996 and 2006 International Social Survey Program (ISSP) data for 17 affluent democracies. Based on multi-level and two-way fixed-effects models, our results mostly fail to support the generic hypothesis that immigration undermines public support for social policy. The percent foreign born, net migration, and the 10-year change in the percent foreign born all fail to have robust significant negative effects on welfare attitudes. There is evidence that the percent foreign born significantly undermines the welfare attitude that government “should provide a job for everyone who wants one.” However, there is more robust evidence that net migration and change in percent foreign born have positive effects on welfare attitudes. We conclude that the compensation and chauvinism hypotheses provide greater potential for future research, and we critically consider other ways immigration could undermine the welfare state. Ultimately, this study demonstrates that factors other than immigration are far more important for public support of social policy.

There is an ungated version here.

A simple parable on cutting government spending vs. raising taxes

Referring to Europe, here is an email (slightly edited for clarity) I sent last night to a libertarian friend:

…let’s say the private sector is so screwed up that at the margin it won’t grow, no matter what, though some going concerns hold govt.-protected monopoly power.

If govt. cuts spending by $100, that is $100 less of output and employment (admittedly may be wasteful), but still the numbers come out that way.  None of those workers are reemployed.

If govt. raises taxes by $100, some of the firms with monopoly power, while their profits are now lower, still will produce roughly the same output.  Neither output nor employment falls so much.

That gives you a composition difference, pretty much fully blameable on government intervention, and without requiring any belief in Keynesian economics.  Govt. spending cuts are *worse* for short-run gdp than are tax increases.

I am not saying that is always the true story, but I don’t see anything in the 1990s Alesina results to convince me to believe otherwise.  Europe (or rather parts thereof) is less dynamic these days.  And I don’t see why libertarians are in such a hurry to dismiss that particular story.

I am not claiming that Keynesian effects have to be zero, but rather using that as a hypothetical starting point.  And this is a thought experiment to raise some points about observational equivalence, not a series of empirical claims about the real world.

You also may notice that in this “model” contractionary fiscal policy lowers gdp.  And while expansionary policy raises measured gdp, it doesn’t necessarily do the economy a lot of good.  It’s like a hidden transfer payment with possible hysteresis benefits through the illusion of make-work, but it is hardly on its own a source of much turnaround.

Assorted links