Month: May 2012

Agricultural yields and the returns to schooling

Agricultural yields, which reflect real returns and are not contaminated by “signaling,” are another independent way to measure the returns from schooling.  Starting with Ted Schultz, this is a significant theme in development economics, and now from John Parman we have a new paper on schooling and agriculture in early 20th century America:

Formal schooling has a significant impact on modern agricultural productivity but there is little evidence quantifying the historical importance of schools in the early development of the American agricultural sector. I present new data from the Midwest at the start of the twentieth century showing that the emerging public schools were helping farmers successfully adapt to a variety of agricultural innovations. I use a unique dataset of farmers containing detailed geographical information to estimate both the private returns to schooling and human capital spillovers across neighboring farms. The results indicate that public schools contributed substantially to agricultural productivity at the turn of the century and that a large portion of this contribution came through human capital spillovers. These findings offer new insights into why the Midwest was a leader in the expansion of secondary education.

The paper is here, hat tip goes to the always excellent Kevin Lewis.  Excellent ungated slides you will find here.  One of the early slides indicates that in stable conditions “experience” outperforms education for generating agricultural productivity, but the value of education is high during times of dynamic change.

Solomon’s Knot and Gray Markets

Solomon’s Knot: How Law Can End the Poverty of Nations has received less attention than some of other recent big books on development but I found it to be rich in institutional detail, wisdom and practical advice. The authors, Robert
Cooter and Hans-Bernd Schafer, are law professors and as befits their expertise they spend less time on why institutions differ and more on the details of how institutions differ–there is more in Solomon’s Knot, for example, on issues like relational finance, venture capital, joint-stock companies, contract law and bankruptcy law than in other books with a similar theme.

Here is one idea that I had not previously considered, should judges enforce contracts in the gray market?

…businessmen and workers must violate many regulations in order to get things done, especially in poor countries. Thus a builder in Cairo violates building restrictions, a worker and employer in Brazil evade employment taxes, and a manufacturer in Russia runs a factory without a permit to do business.

Throughout the world, much of the economy operates in the “grey market”…a survey of 145 countries estimated that gray
markets activities produce between 30% and 40% of GNP (gross domestic
product). The gray market’s share of total employment is even higher than its
share of GNP.

Judges in many countries will not enforce contracts in the gray market considering them null and void due to the extra-legality. Even when the contracts might be enforced, participants fear that they will be otherwise punished if they make use of the legal system. Cooter and and Schafer argue, however, that such contracts should be enforced and a strict separation be kept between law and regulation. They point to Germany as an example:

…Unlike many developing countries, German legal doctrine and practice avoid this
result. German regulatory violations seldom void contracts, and German
prosecutors seldom act on regulatory violations revealed in a civil trial. Thus a
gardener in the German gray market who does not pay taxes can sue an
employer for unpaid wages without fear of triggering regulatory prosecution.
And a customer who buys a restaurant meal at an hour when law requires the
closing of restaurants still has to pay his credit card bill. The same applies for a
construction contract that violates zoning regulations, or a credit contract that
violates banking regulations. Although seldom discussed in constitutional law,
separating the civil courts from the regulators and police is an important part of
the separation of powers, especially in countries with a large gray market.

The case for separation is strongest for gray markets because the underlying acts are not per se illegal but could the argument be extended even to black markets? Jeff Miron and Miron and Zweibel (JSTOR) argue that one reason that drug prohibition increases violence is that when courts are unavailable, violence becomes the least costly method of dispute resolution. What Cooter and Schafer suggest, however, is that it is at least conceivable to have a situation where the act remains illegal but the actors can resolve disputes in court. Imagine, for example, a drug user taking a dealer to court for cutting the product or a prostitute suing a john for not paying.

It seems naive to expect that we would enforce a rule not to use information from civil court to prosecute illegal behavior. Yet there is a precedent; if a police officer obtains evidence illegally, even without intent, then we throw such evidence out of court. A very strange incentive system. Nevertheless, if we can let murderers go free because the evidence against them was obtained illegally then perhaps we could also let drug dealers bring their contract disputes to court without on that basis prosecuting them for drug dealing.

Addendum: Here is a good interview of Cooter by Nick Schulz and an excerpt from the book.

Scaling the Great Wall

Here is my essay from Washingtonian magazine, adapted from An Economist Gets Lunch, about what it is like to shop at a Chinese supermarket for a month.  Here is one bit about search theory:

Then there’s getting your cart down the aisle. The main aisles fit two carts side by side, barely. It’s hard to get down the aisles, and that discourages browsing. My initial tendency was to search the empty aisles, if only because I knew I could get down them without much delay. This obviously isn’t the best strategy, and it led me to spend too much time looking at the highly durable items, which are purchased less frequently by other customers. Overall, I felt far less mobile than in an American supermarket. I started going later at night and avoiding the weekends to circumvent these problems.

It’s common to see a Great Wall customer spending a solid minute or two inspecting the quality of a pineapple, thereby blocking that portion of the aisle. The customers who seek green peas go through the bin pea by pea. One woman became entranced picking out the best garlic chives, and a man asked for sales help in selecting the best clams–by what standard he judged them I’m not sure. No one was much enamored of the scooping technique for filling a plastic bag.

The Rotten Kid theorem?

According to Adecco, nearly a third of parents are helping their kids find work, and nearly one in ten are taking them to job interviews.

…Three percent of recent college grads say their parents have actually sat in with them during interviews, and one percent claim Mom or Dad wrote their thank you notes afterwards.

Nearly one in four say they would not take a job they were otherwise interested in if they could not make or receive personal phone calls at work. Twelve percent say they wouldn’t work at a place that wouldn’t let them check in on Twitter or Facebook. Finally, my favorite, five percent — one in 20 recent grads — say they wouldn’t take a job where they couldn’t shop online, and the same amount would say no to employment where they couldn’t check sports scores.

The story is here, and for the pointer I thank John Chilton.

Four underrated European masterworks

1. The Ravenna mosaics, most of all at St. Vitale.

2. Monreale, the Norman church outside of Palermo, Sicily.

3. Matthias Grünewald’s Isenheim altar, in Colmar, France.

4. Tiepolo’s paintings in the Residenz, in Wurzburg.

I much prefer any of those to the Mona Lisa, and to my prejudiced taste they are all among the very greatest of artistic masterpieces.  They are all worthy of pilgrimages.

Words of wisdom, from men of wisdom

From Arnold Kling:

Mauldin’s claim is that we are in what he calls the “endgame,” meaning that the Keynesian option of increasing government borrowing is no longer available to European countries. The only willing lenders are banks, which in turn need to be propped up, and ultimately they can only be propped up by printing money.

My take-away from Mauldin is that, contra the mainstream media narrative, the real dilemma in Europe is not fiscal–deciding whether to maintain government spending or not. The real dilemma is financial–whether to recognize losses and absorb defaults (by both governments and banks) or turn loose the monetary printing presses.

Creo que si.  It is increasingly clear that Spain’s recent “austerity” has been forced, rather than a voluntarist mistake.  Here is yet more wisdom from Scott Sumner:

… if I thought higher demand was needed, I’d recommend that the fiscal authorities raise their inflation target from 2% to 4%.  Oddly, I’ve never seen a fiscal proponent make that recommendation.  Why not?  My hunch is that deep down they know that fiscal authorities can’t really control inflation.  But in that case, how can they control aggregate demand?

How emigrants try to run their fiscal policies

In survey data collected as part of the study, Washington, D.C.–based migrants from El Salvador report that they would like recipient households to save 21.2 percent of remittance receipts, while recipient households prefer to save only 2.6 percent of receipts.

This is one reason why emigrant workers do not send more back home all at once, namely that the sender does some ex ante forced saving on behalf of the recipient, who otherwise is not trusted to do it.  Remitters also send relatively small sums — typical is $300 — but they send many times a year (16.9 times on average, in one study, despite some fixed costs of sending).  That is to stop the recipient from spending all of the aid at once.

Perhaps you have noticed that cross-national and multilateral aid is also often doled out in multiple parts, rather than all at once.

Is this socially optimal?  Maybe not.  Is this nearly universal?  Possibly so.

The quotation is from Dean Yang, here is more (pdf, see p.12).

I know, I know, M2 isn’t exactly the right indicator

Still, I find this interesting:

M2 money supply growth rates are plunging in Greece (down -16.8% y/y through February), Spain (down -4.7%), and Portugal (-3.8% through January). It is up only 1.3% through February in Italy.

Germany’s M2 is up 7.5% y/y through February. Some of that growth is coming from Greece, Portugal, and Spain, where money supplies are falling as depositors move their funds to banks they deem to be safer in Germany.
The article is here.  Most notable is how the various rates of money supply growth start to diverge around 2010.  For the pointer I thank Alexander Schibuola.

The Rent is Too Damn High

From London:

On 30 April, the housing minister, Grant Shapps, announced that the government was creating a nationwide “beds in sheds” taskforce, to identify the thousands of sheds and outbuildings being illegally rented out, often to illegal migrants. He said it was “a scandal that these back-garden slums exist to exploit people, many of whom … find themselves trapped into paying extortionate rents to live in these cramped conditions”.

The story closes with this:

There are only two toilets, which she says, “is not at all enough”. She is looking forward to returning to Hyderabad, where the living conditions will be much better.

The Myth of Chinese Meritocracy

No doubt you have heard how the leadership of China is meritocratic and composed of technocrats with PhDs. Minxin Pei suggests that there is less than meets the eye.

…Contrary to the prevailing perception in the West (especially among business leaders), the current Chinese government is riddled with clever apparatchiks like Bo who have acquired their positions through cheating, corruption, patronage, and manipulation.

One of the most obvious signs of systemic cheating is that many Chinese officials use fake or dubiously acquired academic credentials to burnish their resumes. Because educational attainment is considered a measure of merit, officials scramble to obtain advanced degrees in order to gain an advantage in the competition for power.

The overwhelming majority of these officials end up receiving doctorates (a master’s degree won’t do anymore in this political arms race) granted through part-time programs or in the Communist Party’s training schools. Of the 250 members of provincial Communist Party standing committees, an elite group including party chiefs and governors, 60 claim to have earned PhDs.

Tellingly, only ten of them completed their doctoral studies before becoming government officials.

Simply put, Chinese institutions are not as good as those in say Mexico. Thus, China will not overtake Mexico in terms of GDP per capita any time soon, hence Chinese growth rates will fall. All we are seeing today is the logic of the Solow model in action.

How much structural unemployment was there during the Great Depression?

A few times recently Paul Krugman has raised the issue of structural unemployment in the Great Depression, so I thought I would offer a look at what has been written on the topic.  Here is Richard J. Jensen, from a survey article:

Economists agree that Keynesian stimuli would not have helped structural or hard-core unemployment, only cyclical unemployment. As Table 1 suggests, about half of the unemployment was cyclical from 1931 through 1933; it was then that stimulus was needed and might have worked. By 1933, the appearance of a large, new, structural/hard-core element raised the natural level of unemployment from the 5 to 6 percent range to 12 to 15 percent. If a Keynesian stimulus had been tried and it had eliminated cyclical unemployment, the remaining unemployment still would have been io to 15 percent. Further fiscal or monetary stimuli would have resulted in inflation.

Later he moves directly to the key question:

…we need to discover how the war cured hard-core unemployment permanently. On the supply side, the growth of high schools and colleges, the postwar draft, and Social Security retirements removed young and old from the labor force. Wartime training and experience, in industry and in the military, made workers more productive, and upgraded skills so that the supply of unskilled labor was much smaller. In terms of efficiency wages, employers reshaped jobs to suit the skills and increase the productivity of available workers. They had to use men (and women) whom they would not have dreamed of hiring a few years before.

Personnel management became even more important. The number of industrial-relations staff rose from 2.5 per 1ooo employees in 1937 to 8.o in 1948. They were charged with improving productivity despite the extraordinary shortage of manpower, the high quit rates, the government-imposed wage freeze, and the new strength of labor unions. They dropped categorical restrictions against the poorly educated, the unemployed, women, the old, the handicapped, and sometimes, in spite of intense resistance, blacks. Recruitment of new workers became an art form, with sound trucks blaring in the streets beseeching people to come to work and earn big money. Jobs were restructured so that fewer skills were needed. Intensive in-shop and in-school training programs reached millions. Anyone with a modicum of skill was rapidly promoted, even to the status of foreman or instructor. The results further justified the use of efficiency-wage procedures, but this time efforts were made to find the right niches for workers who had been “hopelessly unemployable” in the 1930s.

In other words, the path out of high unemployment involved much more than a mere reflation of nominal values.  (By the way, when it comes to terminology I might not use the phrase “structural unemployment,” but it also is not “simple cyclical unemployment.”  I would say that in some circumstances the traditional distinction between cyclical and structural unemployment breaks down, but note that in terms of its parent literature this piece is using the terms properly, even if they sound somewhat off in a 2012 blogosphere context.)

In any case, history suggests that stimulus policy has to take some very specific forms to reach those “called cyclically unemployed by some, structurally unemployed by others” unemployed workers and that is the practical upshot.

Another practical upshot is that you still can believe in labor market hysteresis, as presented by DeLong and Summers.  Without some analysis like the above, the DeLong/Summers claims are otherwise contradicted by American post-Depression productivity once joblessness lifted.  Where were the long-term scars?  Well, they were fixed but it wasn’t easy.  So the relevance of hysteresis can be saved, but we still are left with proper stimulus being very difficult to do, unemployment being quite sticky, and proper policy requiring lots of structural attention.  The Great Depression is evidence for all of those views, not against them.

Here is one more bit, with a sad sting at the end:

The war, by removing millions of prime men from the labor market, by restructuring the work process, by subsidizing wages, and by massive retraining, finally gave the private sector the methods and the incentives to rehire the hard-core. Never since has hardcore unemployment affected more than one worker in a hundred.

Michael A. Bernstein’s book, The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939, also considers the significant role of structural unemployment (don’t forget my taxonomic caveat) in the Great Depression.

It is important to learn from this literature rather than dismiss it.