Month: November 2006

It is true that some European nations are at a par with the United States, and Norway (oil) and Luxembourg (financial services and small population) are above the United States.  But keep in mind that these figures for the top European performers are averages.  Creating low-wage jobs or taking in immigrants will lower such an average butthis effect should not downgrade the true economic performance of the United States. 

A further question is how much "cherry-picking" in Europe should be allowed (e.g., ruling out Greece), while not doing the same for within the United States.  Louisiana and Mississippi are a drag on U.S. averages, and DC probably looks like Luxembourg.

Note also that high rates of government employment, as we find in many parts of Europe, tend to overstate measured gdp.

If we look at recent rates of growth, whether of productivity or of gdp, the U.S. clearly is ahead of Europe, although a forthcoming U.S. slowdown may change that ranking at least for a while.  Much of this seems to stem from information technology, as best we can determine, not "American catch-up."  Try also the Lewis book on productivity.  The micro-evidence all suggests that the U.S. has obtained an ongoing flexibility lead in certain key categories, most of all retailing.

In short, if we view the numbers in context, they still indicate a serious economic problem for social democracy.  Try some demographic projections as well, and their implied economics, a topic on which Quiggin and CT commentators were conspicuously silent.

None of this is counting the America’s greater future capacity to either respond to globalization or absorb immigrants.  I’ve heard many a European envying the future of the American economy, but I’ve never heard of an American envying the future of the French or German economy (except perhaps at CT). 

As I said in my original essay, I still see two "plausible" scenarios for Europe not collapsing.  Eichengreen is yet more optimistic than I am.  But if defenders of social democracy continue to deny the problem, there is no reason to be optimistic at all.

Michael Elsby says no.  In his view, if downward nominal wage stickiness is a potential problem, the relevant class of firms will simply start workers off at a lower nominal wage, raising it over time as need be.  The result will be "wage compression."

Elsby also claims that the Phillips curve trade-off between inflation and unemployment is not stronger at low levels of price inflation.  That suggests that nominal wage rigidity doesn’t much matter at the macro level.  If it did, proximity to that zero nominal cut point ought to boost the benefits of inflation, but it doesn’t seem to.

I am surprised by this argument, but I don’t (yet?) see reason to reject it.

1. This site has lots and lots of links.

2. Ed Glaeser podcast, on paternalism. Here is the full set, including Milton Friedman, produced by Russ Roberts.

3. Time magazine, Best Inventions of 2006.

Just how beneficial are remittances?  One loyal MR reader writes on his blog:

While undoubtedly a portion of remittances are sent back to the U.S. via purchasing power to buy U.S. goods and services, a portion is also kept in-country and used as an alternative monetary system or held by a foreign government as a source of "hard" currency to prop up its domestic money.

Money that leaves the U.S. and never comes back is great for the U.S. government.  Essentially it bought goods and services without ever having to pay up on it’s end of the IOU.  Therefore, shouldn’t Americans support remittances?  America doesn’t run out of money – we’ll just print more.

I am more interested in the effects on the receiving country.

Assume that dollars are sent rather than exchanged for pesos and that the remittance money never returns to the United States.  In essence we are inflating the parallel currency in Mexico (or Vietnam, or wherever).  This means more wealth for the people who receive the remittances.  But who loses? 

Some of the new money will just be inflationary.  People who compete with remittance receivers in consumer markets will face higher prices.

Output and employment will rise in regions with unemployed or underemployed resources, or simply in monopolized sectors.  If a Mexican uses the money to bribe a policeman, or hire a doctor, the quantity effect may outweigh the price effect.  This is the main source of net benefits to the receiving country.  But in perfectly competitive sectors this is just pure inflation.  Note that rural Mexico, where most of the remittances go, is far from perfect competition.

There is also an precautionary insurance gain from having more savings held in dollars, distinct from whatever is finally purchased with those dollars.

Of course, not all of the dollars will stay in Mexico.  Mexico, as a nation, gains to the extent those dollars buy goods and services from the United States, assuming of course U.S. markets are large enough that more Mexican buyers won’t push up prices for subsequent buying Mexicans.  So the best outcome, at least for Mexico, is if the remittances go to people who will carry them back across the border or spend them on imports.

If the dollars are exchanged into pesos, through Western Union, the story differs.  The rate for dollar-peso exchanges moves against the dollar.  This hurts people who have already accumulated dollar-denominated assets; usually those are previous receivers of remittances and of course American tourists who visit Mexico or who buy amates.  It also will hurt Mexican exporters.  Mexican importers gain accordingly.

In sum, it is a complicated story.  Yes, in many regards remittances are more like inflation — albeit in a parallel currency — than like real wealth transfers.  But there are also some important efficiency gains.

We also should not assume that distribution and efficiency are fully separate.  Perhaps the remittances go to people who know better how to invest the money.  Perhaps not.

Comments are open for analysis of remittances, but general talk of Mexican immigration will be deleted…

How does the introduction of new goods affect growth?  While recent
evidence has highlighted the role of new goods in raising the diversity
and sophistication of a country’s production structure, which in turn
matter for growth, little evidence tells us why.  I propose a simple
channel of impact relying on two building blocks.  One, there is a
convergence force operating at the product level.  The further behind
the frontier you are in a given product, the faster you raise quality.
Two, new goods are introduced with a greater distance to the frontier
than in existing goods.  I construct a Schumpeterian growth model with
these features to show how entry into new goods influences aggregate
outcomes by determining the range of products in which convergence
occurs.  Detailed trade statistics provide strong support for both
building blocks of the model.  Using unit values as a proxy for quality,
I find that unit values exhibit strong convergence – at about 5% a year
– for the great majority of products in the sample.  Also the gap in
unit values relative to the world frontier is larger for new goods.
Confirming a key prediction of the model, I further show that, holding
constant levels of development, unit values are inversely related to
measures of diversification and sophistication of a country’s exports.
This last finding helps to explain a recently documented puzzle
regarding the high sophistication and low unit values of Chinese
exports. (To be posted in early November)

Perhaps I will not be convinced (what goods can be produced reflects an unobserved heterogeneity in underlying conditions), but Hwang is worth watching.