Month: September 2013

Assorted links

1. Robin Hanson on automation and wealth.

2. Currency substitution models as they curse India, and what India should do.  And problems with Indian land reform.

3. Will Big Data bring more price discrimination?  And Diane Coyle on starfish, economics, and Average is Over.

4. Are bicycles better than cash? (pdf)

5. China’s dilemma concerning interest rates and financial repression.

6. Short, nostalgic autobiography of Scott Sumner, who also loves Knausgaard.

Herbert Simon on stagnation and automation

In his review of a prescient work called The Shape of Automation (1966), by Herbert Simon, a manifold genius who would go on to win the Nobel Prize in Economics, Heilbroner scoffed at Simon’s notion that the average family income would reach $28,000 (in 1966 dollars) after the turn of the century: “He has no doubt that these families will have plenty of use for their entire income. . . .  But why stop there? On his assumptions of a three percent annual growth rate, average family incomes will be $56,000 by the year 2025; $112,000 by 2045; and $224,000 a century from today. Is it beyond human nature to think that at this point (or a great deal sooner), a ceiling will have been imposed on demand—if not by edict, then tacitly? To my mind, it is hard not to picture such a ceiling unless the economy is to become a collective vomitorium.”

Simon responded drily that he had “great respect for the ability of human beings—given a little advance warning—to think up reasonable ways” of spending that kind of money, and to do so “without vomiting.” He was right about that, of course, even though he was wrong about the particular numbers. Nobody at the time foresaw the coming stagnation of middle-class incomes. His estimate of the average family income in 2006 translates into more than $200,000 in current dollars.

That is from an excellent piece by Daniel Akst on what we can learn from the automation crises of the 1960s.

Coase and Spectrum Auctions

The Coase theorem was first presented by Coase in his 1959 work on the FCC and allocating radio spectrum (jstor). Radio stations interfered with one another (i.e. externalities). Yet Coase argued that with well-defined property rights, spectrum could be allocated in a market just like other goods. In this talk from our MRUniversity course, Economics of the Media, I discuss spectrum allocation, Coase’s triumph at the Chicago dinner and the much longer time to acceptance and application in the real world of the FCC and spectrum auctions.

Who Will Prosper in the New World?

That is a new and short essay from The New York Times, adapted from my almost-out (Sept. 12) book, Average is Over: Powering America Out of the Great Stagnation.  Here is an excerpt from the short piece:

Your smartphone will record data on your life and, when asked, will tell you what to do, drawing on data from your home or from your spouse and friends if need be. “You’ve thrown out that bread the last three times you’ve bought it, give it a pass” will be a text message of the future. How about “Now is not the time to start another argument with your wife”? The GPS is just the beginning of computer-guided instruction.

Take your smartphone on a date, and it might vibrate in your pocket to indicate “Kiss her now.” If you hesitate for fear of being seen as pushy, it may write: “Who cares if you look bad? You are sampling optimally in the quest for a lifetime companion.” Those who won’t listen, or who rebel out of spite, will be missing out on glittering prizes. Those of us who listen, while often envied, may feel more like puppets with deflated pride.

Read the whole thing, interesting throughout.

You can order my book on Amazon here.  On Barnes and Noble here.  On here.  And from Penguin here.

Average Marginal Labor Income Tax Rates under the Affordable Care Act

That is a new paper by Casey Mulligan, here is the abstract:

The Affordable Care Act includes four significant, permanent, implicit unemployment assistance programs, plus various implicit subsidies for underemployment. Every sector of the economy, and about half of nonelderly adults, is directly affected by at least one of those provisions. This paper calculates the ACA’s impact on the average reward to working among nonelderly household heads and spouses. The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect. The ACA’s addition to labor tax wedges is roughly equivalent to doubling both employer and employee payroll tax rates for half of the population.

Mulligan summarizes the paper here, with further detail.  In another new paper, Mulligan compares ACA with Romneycare.

How much will Indian exports go up?

The rupee is lower, but don’t expect a very elastic supply response.  Here is one set of comments:

These [sectors] suffer in particular from numerous domestic obstacles, from overly-restrictive labour and land-acquisition laws to poor supporting infrastructure in areas like power and roads, which make rapid ramp-ups in exports difficult.

Other industries suffer from similar constraints. DG Shah, secretary-general of the Indian Pharmaceutical Alliance, a trade body, says new domestic regulatory impediments, including limits on clinical drug trials that make exports to western markets more difficult, could negate any boost from the plunging currency.

“I’m not entirely convinced that the conditions about the responsiveness of exporters to depreciation mentioned in economics textbooks hold true in India, given these problems,” says one senior Indian policy maker, who asked to remain anonymous. “So its not impossible exports in the round could even go down, which would be a disaster.”

Keep in mind that the Indian growth rate fell from over eight percent to 4.4 percent in not much more than a year, and without any huge noticeable, underlying shock to aggregate demand.  That likely means the Indian economy is supply-constrained and that ongoing growth bumped it up against a very steep portion of a bunch of marginal cost curves.  That limits future export potential.

Alternatively, you might see the Indian economy as oscillating across multiple equilibria.  Further bad news for the rupee could serve as a negative sunspot and indeed we already seeing year-to-year declines in manufacturing activity as of August.  On the brighter side, Indian exports are up 12 percent year-to-year as of July, but it is not obvious that a declining rupee will bring continuing gains through this channel.

There is also this problem:

A look at our major export items suggests there is a change in its composition from price-sensitive items such as leather footwear, dairy products, beverages, textiles and apparel, to less price-sensitive items such as refined petroleum products, chemicals, mineral products (especially, mineral fuels, bituminous substances, etc.), and machinery and transport equipment (engineering goods).

The share of petroleum products in India’s export basket increased dramatically from around 2 per cent in 1993 to around 20 per cent in 2012. The surge in exports in the case of petroleum items is because of India’s potential in oil refining activities.

On contrary, India’s CAD is likely to increase further as oil and precious metals still contribute to bulk of our imports. Controlling CAD is an important factor from the perspective of sovereign rating.

Fortunately, IT exports do seem to be doing well.  More NRIs will be planning weddings in India.  Elsewhere, the trade in processed Indian human hair with Bangladesh is hitting some bumps.  It is also becoming much harder for Indian students to invest in education abroad.

Labor Day and Open Borders

In honor of labor day here are a number of resources on the most pro-labor policy in the world, open borders.

1., the uber-resource and the spearhead of the movement.

2. The Michael Clemens classic, Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? (pdf) and Clemens interview with Russ Roberts.

3. Why Should We Restrict Immigration? (pdf), excellent Bryan Caplan article.

4. My interview on CBC radio making the case for open borders (starts around 3:18).

5. My article from 2000, Economic and Moral Factors in Favor of Open Immigration.

6. The Open Letter on Immigration from over 500 economists.

Hat tip: Daniel Lin.

The etymology of “serendipity”

The first noted use of “serendipity” in the English language was by Horace Walpole (1717–1797). In a letter to Horace Mann (dated 28 January 1754) he said he formed it from the Persian fairy tale The Three Princes of Serendip, whose heroes “were always making discoveries, by accidents and sagacity, of things they were not in quest of”. The name stems from Serendip, an old name for Sri Lanka (aka Ceylon), from Arabic Sarandib. Parts of Sri Lanka were under the rule of South Indian kings for extended periods of time in history. Kings of Kerala, India (Cheranadu)were called Chera Kings and dheep means island, the island belonging to Chera King was called Cherandeep, hence called Sarandib by Arab traders.

Here is more, and for the pointer I thank Vivian.

The charitable deduction in Singapore

There is no reason why deductions cannot be super-charged:

To encourage greater charitable giving in Singapore as the economy recovered, the Minister for Finance announced in Budget 2011 that  tax deduction of 2.5 times will be extended for another 5 years to donations made from 1 January 2011 to 31 December 2015.

The full document is here.  If that does not sink through, here is another discussion:

What this means is that for every dollar that you donate to charities, the government will deduct $2.50 off your tax payable. If you have been paying Income Tax, you will know that this is something extremely beneficial.

A few years ago the deduction was only 2x and that in turn was a relatively new policy.  Do any of you know of research on the impact of these policies and changes?

Here is Bruce Bartlett, who is skeptical about the charitable deduction in the United States.

*Big Gods*

The author is Ara Norenzayan and the subtitle is How Religion Transformed Cooperation and Conflict.  I found this book insightful, well-written and to the point.  The book itself lists some of its key propositions:

1. Watched people are nice people.

2. Religion is more in the situation than in the person.

3. Hell is stronger than heaven.

4. Trust people who trust in God.

5. Religious actions speak louder than words.

6. Unworshipped Gods are impotent Gods.

7. Big Gods for Big Groups.

8. Religious groups cooperate in order to compete.

The book’s home page is here.

On the public choice of Abenomics

Sober Look reports:

Price increases have been driven by weaker yen rather than pricing power improvements of domestic producers. Japan is generating the “wrong” kind of inflation…The combination of declining or stagnant nominal wages and rising prices is creating serious hardships for the nation’s citizens.

Electricity and fuel prices are way up, for instance, as you will see in his graphs.  Contra Sober Look, I suspect this is the way Abenomics is “supposed” to work, and it hearkens back to a long tradition of Japanese policy toward “forced savings,” dating at least as far back as the 1930s.  Still, this decline in real consumption opportunities is exactly why I think there will be practical limits to Abenomics as a sustained strategy for economic growth.  It is rewriting real wage contracts for most workers, and most of them will never get that consumption back or bargain back to the old real wage.  Many exporters will be better off.

And by the way, if you exclude the cost of energy, there is still deflation in Japan.

Final version of my International Trade class reading list

It is here under the fold, and I will still add some pieces, based on your earlier suggestions, though I have not read through them all yet…

International Trade reading list, Fall 2013

Books: Paul Krugman, Geography and Trade, and Development, Geography, and Economic Theory.  Dani Rodrik, One Economics, Many Recipes, and Jacob Viner, Studies in the Theory of International Trade (on-line).

All videos can be found on, if not in the international trade section than in the development economics class or a few on Mexico in the Mexico class.  In general I recommend viewing the videos before tackling the readings.

I. Comparative advantage and free trade

Bernhofen, Daniel and John C. Brown. 2005. “An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan.” American Economic Review.

Autor, David H. David Dorn and Gordon H. Hanson. 2013. “Untangling Trade and Technology: Evidence from Local Labor Markets.” NBER Working Paper.

Acemoglu, Daron, David Autor, David Dorn, and Gordon H. Hanson. 2013. “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper.

Feenstra, Robert C. 2008. “Offshoring in the Global Economy.” Ohlin Lecture Series.

Grossman, Gene M. and Esteban Rossi-Hansberg. 2006. “The Rise of Offshoring: It’s Not Wine for Cloth Anymore.” Federal Reserve Bank of Kansas City.

Grossman, Gene M. 2008. “Trading Tasks: A Simple Theory of Offshoring.” American Economic Review.

Donaldson, David. 2011. “Trade and Labor Markets.” powerpoint.

Khandelwal, Amit. 2009. “The Long and Short (of) Quality Ladders.” Review of Economic Studies.

Bernard, Andrew B., Stephen J Redding, and Peter K. Schott. 2012. “Testing the Factor Price Equality with Unobserved Differences in Factor Quality or Productivity.” U.S. Census Bureau Working Paper.

Baldwin, Richard. 2011. “How Trade and Industrial Organization After Globalization’s 2nd Unblundling: How Building and Joining a Supply Chain are Different and Why it Matters.” NBER Working Paper.

Goldberg, Pinelopi Koujianou and Nina Pavcnik. 2007. “Distributional Effects of Globalization in Developing Countries.” Journal of Economic Literature.

Videos: The two videos on Comparative Advantage, Sources of Comparative Advantage, Development and Trade, empirical evidence, Evidence on Comparative Advantage from Japan, Factor price equalization, Specific Factors Models, Economics of Offshoring, The Rybczynski Theorem, Trade, Investment, and Migration as Substitutes, Unbundling the Supply Chain.

II.Free trade and tariffs

Paul Krugman. “The One-Minute Trade Policy Theorist.” (powerpoint)

Humphrey, Thomas M. 1987. “Classical and Neoclassical Roots of The Theory of Optimum Tariffs.” Economic Review, Federal Reserve Bank of Richmond.

Broda, Christian, Nuno Limao, and David Weinstein. 2008. “Optimal Tariffs and Market Power: The Evidence.” American Economic Review.

Arkolakis, Costas, Arnaud Costinot and Andres Rodriguez-Clare. 2012. “New Trade Models, Same Old Gains?” American Economic Review.

Kehoe, Timothy J. and Kim J. Ruhl. 2006. “How Important Is the New Goods Margin in International Trade?” NBER Working Paper, and now just published, Journal of Political Economy 2013.

Bernhofen, Daniel M., Zouheir El-Sahli, and RIchard Kneller. 2012. “Estimating the Effects of the Container Revolution on World Trade.” University of Nottingham Discussion Paper Series.

Nunn, Nathan and Daniel Trefler. 2010. “The Structure of Tariffs and Long-Term Growth.” American Economic Review.

 Videos: Tariffs v. Quotas, International Trade Disciplines Monopolies, Effective rate of protection, Theory of Optimal Tariffs, Trade and Variety, Does “fair trade” help?, Malawi restrict trade in corn, Market reforms in Bangladesh, John Stuart Mill Terms of trade, The Shipping Container.

III. Heckscher-Ohlin and factor abundance theories of trade

Helpman, Elhanan. 1999. “The Structure of Foreign Trade.” Journal of Economic Perspectives.

Debaere, Peter. 2003. “Factor Abundance and Trade.” Journal of Political Economy.

Deardorff, Alan V. 1979. “Weak Links in the Chain of Comparative Advantage.” Journal of International Economics.

Trefler, Daniel. 1993. “International Factor Price Differences: Leontief Was Right!” Journal of Political Economy.

Davis, Donald R. and David E. Weinstein. 2001. “What Role for International Trade.” NBER Working Paper.

Davis, Donald R. 1995. “Intra-Industry Trade: A Heckscher-Ohlin-Ricardo Approach.” Journal of International Economics.

Deardorff, Alan V. 1982. “The General Validity of the Heckscher-Ohlin Theorem.” American Economic Review.

 Videos: What is at Stake in Trade Theories?, The Heckscher-Ohlin Theorem, Evidence on the Heckscher-Ohlin Theorem.

IV. Increasing Returns

Donaldson, David. “Increasing Returns to Scale and Monopolistic Trade.” Powerpoint, on-line.

Helpman, Elhanan. 1987. “Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries.” Journal of the Japanese and International Economics.

Davis, Donald R. and David E. Weinstein. 2003. “Market Access, Economic Geography, and Comparative Advantage: An Empirical Test.” Journal of International Economics.

Baldwin, Richard and James Harrigan. 2010. “Zeros, Quality, and Space: Trade Theory and Trade Evidence.” NBER Working Paper.

Antweiler, Werner and Daniel Trefler. 2000. “Increasing Returns and All That: A View from Trade.” NBER Working Paper.

Debaere, Peter. 2005. “Monopolistic Competition and Trade, Revisited: Testing the Model Without Testing for Gravity.” Journal of International Economics.

Yi, Kei-Mu. 1999. “Can Vertical Specialization Explain the Growth of World Trade?” Journal of Political Economy.

Harrigan, James. 2001. “Specialization and the Volume of Trade: Do the Data Obey the Laws?” NBER Working Paper.

Bernard, Andrew B., J. Bradford Jensen, Stephen Redding, and Peter K. Schott. 2007. “Firms in International Trade.” NBER Working Paper.

Helpman, Elhanan. 2013. “Foreign Trade and Investment: Firm-Level Perspectives.” NBER Working Paper.

Tybout, James R. 2001. “Plant- and Firm-Level Evidence on “New” Trade Theories.” NBER Working Paper.

Bernard, Andrew B. and J. Bradford Jensen. 2004. “Why Some Firms Export.” Review of Economics and Statistics.

 Videos: Trade and External Economies of Scale, Monopolistic Competition and International Trade, Trade and Increasing Returns: Evidence, Paul Romer, Robert Torrens on strategic trade policy, The Economics of Bollywood.

V. Gravity models

Anderson, James and Eric van Wincoop.  2004. “Trade Costs” Journal of Economic Literature.

Head, Keith. 2011. “Gravity for Beginners.” Presented at US-Canada Border Conference.

Hummels, David. 2007. “Transportation Costs and International Trade in the Second Era of Globalization.” Journal of Economic Perspectives.

Deardorff, Alan V. 1998. “Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?” NBER Working Paper.

Feenstra, Robert C., James R. Markusen, and Andrew K. Rose. 2001. “Using the Gravity Equation to Differentiate Among Alternative Theories of Trade.” The Canadian Journal of Economics.

Evenett, Simon J. and Wolfgang Keller. 1998. “On Theories Explaining the Success of the Gravity Equation.” NBER Working Paper.

Trefler, Daniel. 1995. “The Case of the Missing Trade and Other Mysteries.” American Economic Review.

Anderson, James and Eric van Wincoop. 2003. “Gravity with Gravitas: A Solution to the Border Puzzle.” American Economic Review.

Novy, Dennis. 2012. “Gravity Redux: Measuring International Trade Costs with Panel Data.” Economic Inquiry.

Eaton, Jonathan and Samuel Kortum. 2002. “Technology, Geography, and Trade.” Econometrica.

Donaldson, David. 2011. “Gravity Models.” No Journal—powerpoint.

Rossi-Hansberg, Esteban. 2005. “A Spatial Theory of Trade.” American Economic Review.

Chaney, Thomas. 2008. “Distorted Gravity: The Intensive and Extensive Margins of International Trade.” American Economic Review.

Anderson, James E. 1979. “A Theoretical Foundation for the Gravity Equation.” American Economic Review.

 Video: The Gravity Equation and the Costs of Trade.

VI. Trade in economic history

Blecker, Robert A. 1997. “The ‘Unnatural and Retrograde Order’: Adam Smith’s Theories of Trade and Development Reconsidered.” Economica.

Irwin, Douglas. 2002. “Interpreting the Tariff-Growth Correlation of the Late Nineteenth Century.” American Economic Review.

Irwin, Douglas. 2002. “Did Import Substitution Promote Growth in the Late Nineteenth Century?” NBER Working Paper.

Clemens, Michael A. and Jeffrey G. Williamson. 2001. “A Tariff-Growth Paradox? Protection’s Impact on the World Around 1875-1997.” NBER Working Paper.

John Nye, “The Myth of Free Trade Britain and Fortress France,” Journal of Economic History, 1991.

Harrison, Ann and Andres Rodriguez-Clare. 2009. “Trade, Foreign Investment, and Industrial Policy for Developing Countries.” NBER Working Paper.

Irwin, Douglas. 1997. “From Smoot-Hawley to Reciprocal Agreements: Changing the Course of U.S. Trade Policy in the 1930s.” NBER Working Paper.

Irwin, Douglas. 1998. “The Smoot-Hawley Tariff: A Quantitative Assessment.” The Review of Economic Statistics.

Crowley, Meredith A. and Xi Luo. 2011. “Understanding the Great Trade Collapse of 2008-09 and the Subsequent Trade Recovery.” Journal of Economic Perspectives.

Gopinath, Gita and Oleg Itskhoki. 2009. “Trade Prices and the Global Trade Collapse of 2008-2009.” NBER Working Paper.

Francois, Joseph and Julia Woerz. 2009. “The Big Drop: Trade and the Great Recession.” No Journal, article online.

Videos: Corn Law debates, Friedrich List, Robert Torrens on sliding tariffs, The deindustrialization of India, Tariffs and Growth in the late 19thCentury, South Korea and Industrial Policy, The Smoot-Hawley Tariff, Why Did Trade Plummet in the Great Recession?

VII. FDI and multinationals

Blonigen, Bruce A. 2005. “A Review of the Empirical Literature on FDI Determinants.” NBER Working Paper.

Ramondo, Natalia and Andres Rodriguez-Clare. 2009. “Trade, Multinational Production, and the Gains from Openness.” NBER Working Paper.

Antras, Pol and Stephen R. Yeaple. 2013. “Multinational Firms and the Structure of International Trade.” NBER Working Paper.

Videos: Basics of multinational corporations, Intra-firm Trade, Intra-industry Trade, Gains from Multinationals, Who Gains from FDI?, Productivity in firms, Foreign investment in India, Competition from foreign retailers, What is a Maquiladora? Introduction to NAFTA, NAFTA and Mexican Agriculture, The Effect of NAFTA on the Mexican Economy.

VIII. The politics of trade

Grossman, Gene M. and Elhanan Helpman. 1994. “Protection for Sale.” American Economic Review.

Goldberg, Pinelopi Koujianou and Giovanni Maggi. 1999. “Protection for Sale: An Empirical Investigation.” American Economic Review.

Mayda, Anna Maria and Dani Rodrik. 2005. “What are Some People (and Countries) More Protectionist than Others?” European Economic Review.

Grossman, Gene M. and Elhanan Helpman. 1995. “The Politics of Free-Trade Agreements.” American Economic Review.

Harrison, Ann and Jason Scorse. 2010. “Multinational and Anti-Sweatshop Activism.” American Economic Review.

 Videos: The Political Economy of Tariffs, Does Trade Help the Environment?, Regulation as a Major Trade Barrier, Who Supports Free Trade?, The Cultural Diversity Critique of Markets.

 Some extra readings and videos will be added, as global events indicate.