Month: May 2010
The economic effects of disenfranchisement
Via Chris Blattman, here is a newish paper by Suresh Naidu, on how disenfranchisement translated into inferior economic outcomes for African-Americans:
This paper estimates the political and economic effects of the 19th century disenfranchisement of black citizens in the U.S. South. Using adjacent county-pairs that straddle state boundaries, I rst examine the effect of voting restrictions on political competition. I find that poll taxes and literacy tests each lowered overall electoral turnout by 10-23% and increased the Democratic vote share in national elections by 5%-10%. Second, employing newly collected data on schooling inputs, I show that disenfranchisement reduced the teacher-child and teacher-student ratio in black schools. Finally, I develop a model of suffrage restriction and redistribution in a 2-factor economy with occupational choice to generate sufficient statistics for welfare analysis of the incidence of black disenfranchisement. Consistent with the model, disenfranchised counties experienced a 7% increase in land and farm values per decade, despite a 4% fall in the black population share. The estimated factor market responses suggest that black labor bore a collective loss from disenfranchisement equivalent to at least 13% of annual income, much of which was transferred to landowners.
Here is Naidu's home page. Where did he end up getting a job?
What should World Bank economists do, part II?
My talk there on Thursday outlined and evaluated ten possibilities:
1. Refute the simple (and frequent) fallacies of others in the World Bank.
2. Help the Bank write better contracts — wiser about incentives – for its projects.
3. Study economic growth and Doug North and promote big picture thinking about the big questions that really matter.
4. Abandon big picture thinking — which rarely succeeds – and focus on easy-to-manage public health improvements.
5. Figure out the prevailing net bias in Bank activities and work to offset it. Arguably this bias is that the Bank Board pushes through too many contracts too quickly. Show up to work late. The theory of comparative advantage suggests you focus on what others are lacking.
6. Figure out the prevailing net bias in the economics profession, and work to offset it. Be a generalist.
7. Help the Bank make more money and let the non-economists figure out how to spend it.
8. Take whatever resouces you can, and drop them out of a helicopter onto poor countries. Give up trying to make aid work.
9. Collect and analyze more data.
10. Take a stronger interest in the most effective anti-poverty recipe we have, namely immigration.
Your answers to this question can be found here.
Books in my pile
In various stages of undress:
Sheena Iyengar, The Art of Choosing, reviewed by Virginia Postrel here. Stephen M. Davidson, Still Broken: Understanding the U.S. Health Care System (intelligent book, bad timing since it pushes a non-Obama reform). Peter Heather, Empires and Barbarians The Fall of Rome and the Birth of Europe; good book but I've read too much on this topic lately. What We See: Advancing the Observations of Jane Jacobs, has the pluses and minuses of an edited collection. Boris Groysberg, Chasing Stars: The Myth of Talent and the Portability of Performance; interesting hypothesis but I wanted to see more on regression toward the mean. Stuart Buck, Acting White: The Ironic Legacy of Desegregation, a politically incorrect reexamination of what the title suggests. Matthew E. Kahn, Climatopolis: How Our Cities Will Thrive in a Hotter Future. Nicholas Carr, The Shallows: What the Internet is Doing to Our Brains; is the joke "I couldn't finish it" or "I'm still reading it"? Daniel Rigney, The Matthew Effect: How Advantage Begs Further Advantage, I wonder how much his last book sold.
Assorted links
More Evidence for the Slartibartfarst Principle
Earlier I wrote that due to the Slartibartfarst principle,
…the evidence for intelligent design ought to be readily available in the graffiti of DNA. "Slartibartfast was here," or perhaps "3.14159265," or given what we know of economics, "All rights reserved, MegaCorp. Call for a free estimate."
The fact that, as of yet, we don't see this kind of signature in the data is evidence against intelligent design.
With yesterday's announcement we have a bit more evidence favoring the premise of my argument.
To distinguish their synthetic genome from the naturally occurring version, the researchers encoded a series of watermarks into the sequence. They began by developing a code for writing the English alphabet, as well as punctuation and numbers, into the language of DNA–a decoding key is included in the sequence itself. Then they wrote in their names, a few quotations, and the address for a website people can visit if they successfully crack the code.
Life as advertisement, this is the wave of the future!
Why is Europe so worrisome for the financial markets?
Scott Sumner writes:
Stocks crashed 4% today because people are increasingly worried about the macroeconomy. Yes, there are real aspects to the Greek crisis. Greece will need to engage in austerity over the next few weeks. But Greece, Portugal, and Spain are not big enough countries to knock 25% off the price of oil in one month. Oil prices are plunging for the same reason as US equity prices are plummeting–fear of a sharp fall in AD (and hence economic activity) all over the world.
I don't yet follow Scott's reasoning. If anything, in very recent times the ECB has shown it is willing to abandon independence to monetize various national debts. How much that will boost nominal GDP I am not sure, but I don't take it as negative news for nominal GDP, relative to previous expectations.
I am usually reluctant to play "market psychologist," but I see potentially insolvent banks as a major issue, plus their connection to money market funds. That has an AD link to be sure, but the uncertainty of another major bailout, and its fallout for intermediation, would be paralyzing to financial markets. Most of all, the fear is that "Europe-as-we-knew-it" was a bubble of sorts, and that other people's digestion and comprehension of that possibility will create adjustment problems around the world, including China.
I'm not convinced that the "end of the tunnel" for Europe on this one has to be so dire. (Imagine the 1987 world, with Greece not on the Euro, and extrapolate it, with Greece in default a lot of the time but with most of Europe simply being Europe; is it so bad?) It's the uncertainty about the transition path and what that path means for broader notions of European cooperation. It's like imagining a man committed to driving from here to there, yet with no paved road in between or maybe also no unpaved road. Yet Europe is committed to the journey.
The Executive dining room at the World Bank
The room mixes many different cuisines in the form of a buffet, so you can test directly a theory of buffets, while holding quality of the kitchen constant. The cold part of the buffet is excellent, especially the smoked salmon and the prosciutto with melon, both well above typical U.S. standards. Lamb tends to hold up relatively well in the buffet format. Avoid anything cooked rapidly at high heat, with sealed-in juices. Never take most forms of Chinese food from a buffet. The chicken vindaloo was soggy, though Indian generally does well in the buffet format. I looked for fermented Korean snacks but in vain. The shrimp with cilantro was better than expected, vaguely Peruvian. At no point were they trying to trick me with "filler." Overall you could do worse than to eat here, which implies donor opinion is a constraint on raising WB salaries explicitly.
What are the other principles for eating properly at buffets?
Markets in everything
Hedge funds have found a new market to invest in: whistle-blowers.
Informants who turn in tax cheats have to wait years to get their share of any reward from the I.R.S.’s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. They are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.
The surging size of the potential awards is driving all the interest. Three years ago, the I.R.S. began offering bigger rewards – 15 percent to 30 percent of whatever money the government recovered – in a move that has turbocharged the agency’s whistle-blower program.
The full story is here. And what about the price?
While the market in whistle-blower futures is in its infancy, investors have been requesting as much as 65 percent of any award an informant receives, according to lawyers negotiating possible deals. In the more established field of litigation finance, investors who underwrite the cost of a lawsuit get 5 percent to 50 percent of any legal settlement or jury award.
And Craig Venter said, “let there be life.”
Assorted links
1. A granular look at financial market job losses.
2. Thumbcharts.
3. "Keep your identity small."
4. Should pedicures by fish be banned?
5. "Disacknowledgements", the anti-authors "without whom the work would have proceeded much more briskly and less painfully".
Facts about Ireland
The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product (G.D.P.) is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are near-identical, but in Ireland they are not.
When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected – by our calculation – to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.
That's Simon Johnson, here is more.
Incorporated Men and Women
In my post on The Unincorporated Man “framing” writes:
Instead of saying that a corporation can own shares in your income, how about saying it is like a loan that you wont get into trouble ever paying back, but will have to pay more if you become rich.
Exactly. In fact, I have written about income-contingent loans before and how one of them got Bill Clinton through college. At the PSD blog Ryan Hahn also points to Lumni, a new firm that is investing in human capital in the developing world:
Lumni designs, markets and manages “Human capital funds”, an innovative investment vehicle for financing education. Students agree to pay a fixed percentage of their individual incomes for a predetermined number of months after graduation. The arrangement traspases part of the risk of investing in education from the student to the investor, who is in a better position to diversify it.
Lumni is the brainchild of economics professor Miguel Palacios. Here is his book and Cato paper on human capital contracts.
Slightly scary stories about the leverage of European banks
Felix Salmon and I were on the radio a few days ago and we agreed (I think) on the need for as-simple-as-possible stronger limits on bank leverage. I browsed the web to see how this struggle was going and ran across the following, from March:
A planned cap on bank leverage would not make the sector safer, said a German banking lobby on Friday, adding heavyweight support to a growing campaign.
This is scary for at least two reasons. First, it may be difficult to implement a leverage restriction in the United States, as supposedly this would be happening through an international agreement, namely Basel III. This is a major (the major?) problem with the current banking bill. There is then this:
France does not want a fixed numerical cap, preferring to give national regulators discretion in supervising leverage.
Deutsche Bank (DBKGn.DE), a member of the BDB, says a ratio is simplistic, while Sweden wants a carve-out for its banks.
And this:
The BDB said a study from the WHU Otto Beisheim School of Management concluded a ratio would likely force banks to scale back on lending and threaten recovery.
Might I go out on a limb and suggest that some of these European banks are…excessively leveraged? In theory the Basel III reforms will adjust the leverage restrictions for the risk of bank assets. It's been the case for a long time that many German banks have higher measured degrees of leverage. But are they more leveraged, all things considered? If they're worried about Basel III, maybe the answer is yes.
From the comments, on the inevitability of utilitarian judgments
Mario Rizzo writes:
Tyler, please. You should have taken my course this past semester. Benthamite reasons. Bentham is a total mess. One commentator said that Benthamite utilitarianism is a philosophy that tells you what to do when you have the data that you cannot obtain. This is it in a nutshell.
I very often agree with Mario and even here I think I agree with Mario, though Mario doesn't think he agrees with me.
To be sure, I am not a Benthamite utilitarian, if only because I believe rights should sometimes trump utilitarian recommendations. Furthermore, schema for making interpersonal comparisons involve value judgments, which means the Benthamite calculation is never purely descriptive but rather contains significant elements of other, non-Benthamite moral theories.
That said, Benthamite reasoning is hard to escape. Everyone relies on it when making decisions in everyday life, whether it be voting on a job candidate or buying one car rather than another or putting a bus line on one road rather than another. Even a lot of the arguments for following rules rely on an ultimate Benthamite judgment about good vs. bad consequences.
The fact that one might be wrong in any particular estimation — always the case — doesn't change the need to make a final judgment. "Benthamite" makes it sounds more scientistic than it needs to be, since Bentham had some unusual views, but still an assessment needs to be made.
Mario offers an instructive comment: "Bentham is a total mess." Is this an aesthetic critique, or is the suggestion that following Benthamite maxims won't lead to utility-positive results? If the latter, which is what I suspect, Mario is himself a Benthamite broadly speaking and in that sense we (at least partially) agree.
Maybe you're a preference utilitarian, but when it comes to aggregation, or how you interpret "veil of ignorance" results, you're still going to rely on utilitarian constructs to do a lot of the final work in the theory. If your imaginary people are behind a veil of ignorance, they've got to estimate the cardinal utilities (broadly interpreted) associated with different results. You're just shifting the cardinal comparison to a different place, away from the theorist (supposedly) and into the hands of the veiled ones.
Benthamite reasoning is inescapable, though it is a big mistake to make cardinal utility the only relevant value. We're all pluralists now, but cardinal utility should be a major part of the relevant pluralist bundle.
What should World Bank development economists do?
World Bank development economists, most of all. I'm giving a talk on this topic tomorrow at the World Bank (South Asia division) and I thought I would solicit your advice and opinions. If you could reallocate the effort of economists within the World Bank, what would you propose? More big picture study? More RCTs? Should they spend more time refuting the simple fallacies of the economically illiterate? Or should they invest in a stronger capacity for technical economics? Should they offer more concrete advice on how to write incentive-compatible contracts for projects? Should they calculate theories of the net bias in remaining World Bank institutions (too many contracts?) and act to counter those biases? Or should they more or less give up on the idea of development and spend their time promoting the idea of freer immigration, as Michael Clemens does?
Sarcastic answers are welcome too.
What should World Bank economists do?