Does the youth dependency ratio drive economic growth?

by  Tyler Cowen in

Jane Galt and Malcolm Gladwell have a tiff. 

Gladwell, citing David Bloom and David Canning, suggested that changes in the "youth dependency ratio," account for a big chunk of Irish economic growth.  The youth dependency ratio refers to how many young-uns require support, relative to the broader population.  The Irish legalized contraception in 1979, birth rates continued to fall, and later the economy boomed.  But is the connection a causal one?

Here is a basic argument and model that the youth dependency ratio can matter.

I can see three possible mechanisms.  1) Fewer babies mean that more women work.  2) Fewer babies mean that each baby gets more parental investment; in the long run those people are smarter.  3) Fewer babies raises the savings rate.

Which of these might have operated in Ireland? 

On Mechanism #1, Irish women still work much less than the OECD average, yet Ireland is wealthier than almost anywhere else in Europe.  If a theory of growth first postulates a big or dominant effect, and then predicts rates but fails when it comes to predicting levels, I worry.

If we look at "rates of growth" only, this estimate suggests that more Irish female labor accounts for 1.5 percent Irish growth a year.  That hardly covers the growth gap between Ireland and the rest of Europe.  One estimate of elasticities suggests that an extra kid lowers an Irish woman’s chance of working full-time by 11.3 percent, but raises her chance of part-time work by 7.7 percent.  How far does that get us?  Bloom is a renowned labor economist but his article is far from state of the art macroeconomics.  Do note that increases in "total factor productivity" — often driven by foreign investment — seem to be more important than "growth in labor inputs" by a three to two ratio.

It ought to be easy to show evidence that the Irish boom has been strongest in the sectors where women work the most, such as services and not manufacturing.  I can’t find that evidence, can my readers?

Mechanism #2 is for the long run and it cannot explain the Irish boom of recent times or the timing of its possible connection to contraception.  Higher skills are a big part of the Irish story, but the trend started in about 1967. 

Mechanism #3: In Ireland, since the mid 1970s, gross private savings rates have been falling, more or less.  More generally, time series models for a single country, including demographic ones, don’t predict savings rates very well.

These studies I am citing have their defects, but they do show that the overall question is not so simple.

Notes:

1. These graphs show that, for developing countries, the change in the youth dependency ratio has "eyeball power" for 1975-1990, but not for 1960-1975. 

2. This study of Asia suggests that the youth dependency ratio matters, often through the savings rate (not the Irish scenario); the entire story is conditioned by "institutional factors."

3. Latin America has had falling birth rates but has failed to cash in.  As Bloom stresses, favorable birth rates help only if the country has good policies for putting the new female workers into productive positions.  In this regard Galt and Gladwell may not be so far apart.

The bottom line: How much of the Irish boom is caused by the change in the youth dependency ratio?  I don’t know.  If I had to offer a "I’m just a poor lil’ ol’ blogger but I’ve read lots of real business cycles macroeconomics simulation papers" seat of the pants sort of estimate, I would opt for a maximum of 15 to 20 percent.  That’s certainly worth writing about, but it is not the major story either.  I’d like to see a sectoral decomposition analysis, and I suspect that would point our attention toward FDI, education, and a favorable tax regime as bigger factors.

Addendum: Malcolm adds more.

Lynne Munson reviews my book

by  Tyler Cowen in

She covers Good and Plenty: The Creative Successes of American Arts Funding, in The Weekly Standard.  Here is the link, which offers only a bit of the review to non-subscribers.  Here is an excerpt from the critical part of her review:

…few critical observers would agree that contemporary American art has put its best work forward in recent decades, when our artists and art institutions have enjoyed more riches than at any other time in history.  Contemporary American artmaking has been monopolized for nearly a half-century by postmodernism, a politics-obsessed formulaic approach that has yielded such shock-art masterpieces as Andres Serrano’s Piss Christ (which finds itself in numerous museum collections).  Artists who do not work in the postmodern mode are excluded from museum exhibitions and the best galleries.

Of course, no better can be said of the products of the European art world, whose denizens have, at best, striven to vie with their postmodern American counterparts for the prize of Most Shocking.  But to argue, as Cowen does, that "the American model encourages artistic creativity [and] keeps the politicization of art to a minimum," is to be unaware of how narrow and prescriptive American artmaking has become.  The simple fact is that artmaking in America has been taken over by a single bad idea, despite the ample and diverse funding it receives.

Her last sentence is a good illustration of how two people can look at the same facts and see such very different patterns.

China market(s) of the day

by  Tyler Cowen in

From A Singapore Economist:

Chinese officials have decided to crack down on the practice at some
rural villages of hiring strippers to perform at funerals.  The practice
is intended to attract more attendees to funerals because many people
believe that a greater number of people improve the deceased’s chances
for better afterlife.  They also think that more people bring luck to
the survivors as well.

Ah, but a new market has sprung up in its place:

Local officials [have been] told they must submit plans for funerals
within 12 hours after a villager dies.  Exotic dancing is off the menu –
and residents can report “funeral misdeeds” on a special hotline for a
reward of USD $35.

Everybody Coffins

by  Tyler Cowen in

Caterina reports:

Everybody Coffins produces coffins that are easy to assemble without tools, IKEA-style, and ship flat easily. They’ve built them for emergencies, but I think they will probably see another big market from people who want economical coffins, unlike those gilt mahogany extravaganzas that funeral homes try to push upon the bereaved.

Don’t think the lower-middle class is being denied the benefits of economic growth.

If you prefer a more modern look, here are coffins designed to look like sleek cocoon-like pods, made out of soy and jute.  They decompose in fifteen years.

Why People Die By Suicide

by  Tyler Cowen in

The studies on those who attempt suicide multiple times and on the vigorous association between past and future suicidality (even accounting for "kitchen sink" variables) are consistent with the view that people habituate to self-injury and thereby gain the ability to enact increasing severe suicidal behaviors.

That is the main argument of Thomas Joiner’s Why People Die by Suicide.  Here is the book’s home page.  Here is an excerpt.  Here is a summary.  By the way, athletes, who are used to harming themselves, commit suicides at relatively high rates.

The traditional economic approach compares the costs and benefits of staying alive, with option value thrown in for good measure.  It seems more realistic to treat people as having periodic suicidal urges, but (fortunately) usually lacking the capability to execute those urges.  Why some people find reason to work their way "up the ladder" of capabilities is the next question.  Perhaps the mechanisms behind suicide have more to do with employment, and with economic growth, than we used to think.  Rather than making an analysis of suicide more like modern economics, should economics become more like the theory of suicide? 

More people die by suicide in New York City than are murdered; here are twenty facts about death.  Have I mentioned?  It seems to be "Death Day" over at MarginalRevolution this lovely Tuesday…

Wisdom from James Galbraith

by  Tyler Cowen in

Via Brad DeLong:

Income inequality soared in the late 1990s.  Why?  A decomposition by
region and sector can tell you pretty much exactly: it was the tech
bubble and the stock boom. Capital gains and stock options
realizations.  Much of it in just five places in the whole country:
Manhattan, King County WA, and Santa Clara, San Francisco and San Mateo
Counties, CA.  Take out those five, as Travis Hale and I showed in a
paper, and the between-counties component of income inequality (which
isn’t all of it, but it isn’t chopped liver, either) doesn’t go up at
all.

Meanwhile, earnings inequality went down in the same time.  Why?  Full
employment.  This component of inequality is closely tied to utilization
rates and unemployment.  It varies with hours worked, and overtime
earned, more than anything else.  It is, in short, a macroeconomic
phenomenon.

Addendum: Here is more wisdom from that blog, on welfare reform, an overrated event in terms of its significance, though I will demur on the minimum wage question.

Why Paramount dumped Tom Cruise

by  Tyler Cowen in

Mr. De Vany and W. David Walls, an economist at the University of
Calgary, took those factors into account.  Looking across a sample of
more than 2,000 movies exhibited between 1985 and 1996, they found that
only seven actors and actresses – Tom Hanks, Michelle Pfeiffer, Sandra Bullock, Jodie Foster, Jim Carrey, Barbra Streisand and Robin Williams – had a positive impact on the box office, mostly in the first few weeks of a film’s release.

In the same study, two directors, Steven Spielberg and Oliver Stone also pushed up a movie’s revenue.  But Winona Ryder, Sharon Stone and Val Kilmer
were associated with a smaller box-office revenue.  No other star had
any statistically significant impact at all.  So what are stars for?  By
helping a movie open – attracting lots of people in to see a movie in
the first few days before the buzz about whether it’s good or bad is
widely known – stars can set a floor for revenues, said Mr. De Vany.

Here is the full story, on the new economics of cinema. 

I am a bit closer to an efficient markets view on this question.  Stars don’t matter much per se.  But many stars — or their agents — are good at picking the right movies to star in.  Other more critical inputs, including good scripts and marketing expenditures, follow these stars around.  The value of the star drops out of the regression, but the star was still the key certifier to get the quality put into the movie in the first place.

Addendum: Here is Art DeVany’s blog, and here is Art on beer and pizza.

Contagious capitalism?

by  Tyler Cowen in

From the distant reaches of West Virginia, Peter Leeson and Russ Sobel report:

Is capitalism contagious?  Since WWI, global foreign policy has treated economic freedom/repression like a virus that spreads between countries.  Most recently, the domino theory of freedom has played prominently in U.S. foreign policy toward Asia, Latin America, and the Caribbean during the Cold War, and the Middle East during the War on Terror.  This paper investigates the spread of economic freedom between nations.  Our analysis considers two potential channels of this spread: geography and trade.  We estimate two models of spatial dependence using panel data that cover more than 100 countries between 1985 and 2000. We find that capitalism is in fact contagious.  Countries consistently catch about 20 percent of their average geographic neighbors’ and trading partners’ levels and changes in economic freedom.  We also explore American foreign military intervention’s ability to spread economic freedom abroad.  We find that although intervention may increase freedom in U.S.-occupied countries, this freedom is not contagious.  Using our estimates of freedom’s spread when it is contagious, we simulate the impact of successful Iraqi occupation on Middle Eastern freedom.  Even under the most favorable assumptions, we find that U.S. occupation would minimally improve freedom in this region.

I asked Peter what kind of lag specification was reasonable in this context.  Five years, ten years, or two hundred years?  It should make a big difference for the results.  Is Denmark still "free-riding" off England’s relative economic freedom from the 12th and 13th centuries?  Maybe yes.  I don’t like their train system, or for that matter their little gardens, but every time I am in England I kiss the ground of The Mother Lode of Liberty.

Forward contracts in Spanish ham

by  Tyler Cowen in

The regulators
have been satisfied and high-quality Spanish ham can now be bought in
the United States.  "Bought" is the operative word, you still have to
wait for the aging:

Saltzman and several hundred other people felt strongly enough about
getting some really good ham to willingly plunk down their money months
or even years before they would actually get to eat it, La Tienda could
demonstrate to the producer that complying with U.S.D.A. rules would
have a financial payoff. The store began selling the chorizo in July;
the hams from bellota-fed pigs have another year or so hanging in
mountain air.

It can hang in your living room.  Why shell out the thousand bucks? 

…food lovers like him understand…And in the end, the elaborate
narrative of the ham (the way it is produced, his advance payment, the
visit to the picturesque town in western Spain where it’s made) is a
thing to be savored almost as much as the meat itself. “I must say,”
Saltzman adds, “I’ve gotten incredible mileage out of the whole ham
story.”

And don’t forget the pro-globalization angle to the story:

…the nexus of an ever-shrinking world and gourmet culture’s eternal
quest for authentic, regional products have often had the effect of
saving artisanal food products that might have died out

Here is the full story, and thanks to Don Boudreaux for the pointer.  Buy it here, and yes that is from acorn-fed black pigs…

If I were a Muslim, would I be a Shiite or a Sunni?

by  Tyler Cowen in

But now you all know my love of counterfactuals.  Vali Nasr writes:

…what separates Shiism from Sunnism is not so much the divergences in practice as the spirit in which Islam is interpreted.  First, whereas Sunnism took shape around belief in the writ of the majority and the legitimating power of communal consensus.  Shias do not put much stock in majority opinion in matters of religion.  Truth is vested not in the community of believers but in the virtuous leadership of the Prophet and the descendents.  Whereas Sunnis have always placed greatest emphasis on the Islamic message, Shias have also underscored the importance of the vehicle for that message.  Some have explained this difference by saying that Sunnis revere the Prophet because he relayed the Quran to Muslims, whereas Shias reverse the Quran because the Prophet relayed it [TC: to this non-specialist, this seems like an exaggeration of the difference on the Shiite side; here comes the qualifier though…].  Although most Shias stop short of holding such a view, there is no doubt that more extreme Shias have subscribed to it, and that Shiism places great emphasis on the prophetic function in tandem with the Islamic message.

That is from Vali Nasr’s The Shia Revival: How Conflicts within Islam Will Shape the Future.  This is the most informative non-fiction book I have read in at least a month; I learned something — or at least thought I did — from every page. 

Addendum: Here is a good article on Islam and capitalism in Turkey.

Interview with Guillermo Calvo

by  Tyler Cowen in

From the Richmond Fed, the focus is Latin America.  Here is one insightful bit of many:

RF: What is your opinion of Hernando de Soto’s The
Other Path? What lessons can policymakers in Latin
America take from that book?

Calvo: The main lesson is that regulations must be
simplified as much as possible in order to encourage the development
of the formal sector and, thus, most likely enhance the
pace of technical progress. However, I am skeptical that a major
overhaul of government regulations will have a major effect in
the short or medium term. The reason is that the informal sector
strongly relies on tax evasion and, unless you implement a
major tax moratorium – accompanied by substantially lowered
tax rates –firms are likely not to move to the formal sector,
even if all the red tape is eliminated. Moreover, a moratorium is
likely to have detrimental moral hazard implications.