Category: Economics
French facts of the day
Macron’s government consistently spent more as a share of total output than any other OECD member, with the public sector accounting for over 57% of GDP in 2024. The telling trend is France’s divergence from its neighbors. When Macron took office, France’s debt-to-GDP ratio was 11 percentage points above the Eurozone average; by 2024, that gap had increased to 25 points. Public debt is set to hit 116% of GDP in 2025 and the deficit is set to double the EU average.
France’s fiscal stance under Macron reflects continuity with recent trends, rather than any break with the past. The Stability and Growth Pact sets a 3% deficit and a 60% debt reference. Since 2002, France has breached the limits every year, and the deficit limit every year except two. More telling, France’s deficit has exceeded the Eurozone average every single year since 2002. Its public debt has grown faster than its peers’ since 1995, with only a brief pause under President Sarkozy…
And:
In 2021, Macron signed a law that commits France to zero net land development by 2050 (and half by 2030), making it illegal to develop any land in France unless some existing city or village is demolished. His governments banned renting less-well-insulated homes, allowed councils to forbid building second houses, and imposed nation-wide rent controls.
That is from Luis and Pieter Garicano.
Nobel Prize in economics goes to Philippe Aghion and Peter Howitt and Joel Mokyr
Excellent choices. Here is the press release with links to longer discussions of their works.
This is a prize for economic growth, and for the ideas of creative destruction. Those are some of the most important ideas in economics, so I could not be happier with this pick. Joel Mokyr in particular has been a long-time associate of GMU and Mercatus, so I would like to congratulate him in particular.
Aghion is at INSEAD in France, Howitt at Brown, and Mokyr at Northwestern. It is also nice to see some people outside of “the usual schools” winning the prize. Aghion and Howitt, of course, worked together to produce a model of creative destruction and economic growth. Here are their key papers together.
Joel Mokyr is an economic historian, and best known for his pioneering work in explaining the Industrial Revolution in England. Here are his best-known works. Read The Lever of Riches and The Gifts of Athena and A Culture of Growth. I have benefited most from The Enlightened Economy: An Economic History of Britain 1700-1850. He has a new book coming out in November, with Tabellini and Greif. It is correct to consider him as an “Enlightenment thinker.” Brian Albrecht has a good thread on this.
Below you can find individual posts on Aghion, Howitt, and also Mokyr. Here is Alex’s post on the prize.
The Economics Nobel goes to Mokyr, Aghion and Howitt
The Nobel prize goes to Joel Mokyr, the economic historian of the industrial revolution and the growth theorists Phillippe Aghion and Peter Howitt best known for their Schumpeterian model of economic growth.
Here’s a good quote from Nobelist Joel Mokyr’s the Lever of Riches.
Yet the central message of this book is not unequivocally optimistic . History provides us with relatively few examples of societies that were technologically progressive. Our own world is exceptional, though not unique, in this regard. By and large, the forces opposing technological progress have been stronger than those striving for changes. The study of technological progress is therefore a study of exceptionalism, of cases in which as a result of rare circumstances, the normal tendency of societies to slide toward stasis and equilibrium was broken. The unprecedented prosperity enjoyed today by a substantial proportion of humanity stems from accidental factors to a degree greater than is commonly supposed. Moreover, technological progress is like a fragile and vulnerable plant, whose nourishing is not only dependent on the appropriate surroundings and climate, but whose life is almost always short. It is highly sensitive to the social and economic environment and can easily be arrested by relatively small external changes. If there is a lesson to be learned from the history of technology it is that Schumpeterian growth, like the other forms of economic growth, cannot and should not be taken for granted.
Aghion and Howitt’s Schumpeterian model of economic growth shares with Romer the idea that the key factors of economic growth must be modelled, growth is thus endogenous to the model (unlike Solow where growth is primarily driven by technology, an unexplained exogenous factor). In Romer’s model, however, growth is primarily horizontally driven by new varieties whereas in Aghion and Howitt growth comes from creative destruction, from new ideas, technologies and firms replacing old ideas, technologies and firms.
Thus, Aghion and Howitt’s model lends itself to micro-data on firm entry and exit of the kind pioneered by Haltiwanger and others (who Tyler and I have argued for a future Nobel). Economic growth is not just about new ideas but about how well an economy can reallocate production to the firms using the new ideas. Consider the picture below, based on data from Bartelsman, Haltiwanger, and Scarpetta. It shows the covariance of labor productivity and firm size. In the United States highly productive firms tend to be big but this is much less true in other economies. In the UK during this period (1993-2001) the covariance of productive and big is considerably less than half the rate in the United States. In Romania at this time the covariance was even negative–indicating that the big firms were among the least productive. Why? Well in Romania this as the end of the communist era when big, unproductive government run behemoths dominated the economy. As Romania moved towards markets the covariance between labor productivity and firm size increased. That is the economy became more productive as it reallocated labor from low productivity firms to high productivity firms.
Aghion and Howitt’s work centers on how new ideas emerge and how creative destruction turns those ideas into real economic change through the birth and death of firms. But creative destruction is never painless—growth requires that some firms fail and that labor be displaced so resources can flow to new, more productive uses. Aghion and Howitt will likely point to the United States as dealing with his process better than Europe. Business dynamism has declined in Europe relative to the United States, a worrying fact given that business dynamism has also declined in the United States. Nevertheless, the US has a more flexible labor market and appears more open to both the birth of new firms (venture capital) and the deaths of older firms. Yet, in both the United States and around the the world the differences between high productivity and low productivity firms appears to be growing, that is the dispersion in productivity is growing which means that the good ideas are not spreading as quickly as they once did. Aghion and Howitt’s work gives us a model for thinking about these kinds of issues–see, for example, Ten Facts on Business Dynamism and Lessons from Endogenous Growth Theory.
The case for a Nobel to Joel Mokyr
Here is GPT-5 making the case. Excerpt:
A micro‑foundation for growth: “useful knowledge,” its two forms, and the Industrial Enlightenment
Mokyr’s signature contribution is to put knowledge—not just capital, labor, or “institutions” in the abstract—at the center of modern growth. In The Gifts of Athena and subsequent papers and lectures, he distinguishes between:
Propositional knowledge (“knowledge what” about natural regularities), and
Prescriptive knowledge (“knowledge how” about techniques and production).
He argues that sustained growth arises when a society builds positive feedback between the two: deeper scientific understanding makes techniques improvable, while new techniques generate puzzles that push science forward. This is the Industrial Enlightenment: a culture that expects progress, rewards it, and knits together savants and artisans in a “Republic of Letters,” a kind of 18th‑century knowledge commons with rules for open exchange, replication, and credit…
In The Enlightened Economy and A Culture of Growth, Mokyr shows that the British/European break‑out ca. 1700–1850 was propelled less by isolated “heroic” inventions or factor prices alone and more by a cultural–epistemic shift: an elite market for ideas in a politically fragmented Europe created exit options for heterodox thinkers and incentives for rulers to compete for talent. This account complements rather than denies other forces (coal, wages, property rights), but it explains persistence—why growth became self‑sustaining.
…Joel Mokyr changed how economists explain the onset and persistence of modern growth. He supplied a historically grounded, analytically sharp account of how societies produce, organize, and circulate knowledge so that it becomes self‑amplifying. That account has not only reshaped economic history; it has supplied live ammunition for growth theory and for policy in a world where intangible, recombinable knowledge is the main engine of prosperity. The 2025 Nobel Committee’s decision to honor him alongside Aghion and Howitt simply makes explicit what many researchers have long recognized: innovations power growth, and Mokyr showed us how societies build the machinery that powers innovations.
Here is Mokyr in scholar.google.com. Read The Lever of Riches and The Gifts of Athena and A Culture of Growth. I have benefited most from The Enlightened Economy: An Economic History of Britain 1700-1850. You can ask Joel just about anything concerning the Industrial Revolution and he will have an amazingly well-thought answer. He has a new book coming out in November, with Tabellini and Greif. It is correct to consider him as an “Enlightenment thinker.” Brian Albrecht has a good thread on this. And see Matt Yglesias. Note also that Mokyr barely has a presence in the “top five” journals.
The case for a Nobel to Philippe Aghion
GPT-5 is very good at this, so I posed the question and here is the answer. Excerpt:
Schumpeterian growth, made operational.
With Peter Howitt, Aghion’s 1992 Econometrica paper formalized growth “through creative destruction”: quality‑improving (vertical) innovations by entrants and incumbents drive productivity while rendering old technologies obsolete. The model delivers dynamic equilibrium, transitional dynamics (including no‑growth traps), and clear normative trade‑offs between innovation rents and competition. The paradigm was consolidated in two field‑defining books, Endogenous Growth Theory (1998) and the graduate‑level text The Economics of Growth (2009), and popularized for policymakers in The Power of Creative Destruction (2021/2023)…Aghion (with Acemoglu and Zilibotti) showed that the right growth institutions depend on how close an economy is to the global frontier: early‑stage economies may need investment‑based strategies; frontier economies require selection, entry, and competition to sustain innovation. With Howitt, he integrated this into a unifying framework for “appropriate growth policy,” organizing the roles of competition, education, macro stabilization, and finance. This perspective reframed convergence and policy sequencing debates…
“Missing Growth from Creative Destruction” quantified how standard price imputation understates growth when new products replace old ones; their estimates suggest roughly ½ percentage point per year of “missing” US growth in 1983–2013. This reframes productivity‑slowdown diagnostics and national‑accounts practice…
Beyond specific papers, Aghion has built a field: the textbooks (Endogenous Growth Theory; The Economics of Growth) trained a generation of researchers; the policy synthesis (The Power of Creative Destruction) carried the ideas to cabinets and agencies; and his research group at the Collège de France continues to push on environment, productivity, and mobility. These are classic signs of Nobel‑level influence: a unifying paradigm that reshapes inquiry and policy across domains.
Right now Aghion is speaking to the committee and telling them that Europe should not be so dependent on tech advances from America and China. Here are his books. Here is the Nobel Committee on his work. Here is GPT-5 with a detailed presentation of the Aghion-Howitt model, apologies for any errors but I could not do it better.
The case for a Nobel to Peter Howitt
He was born in Canada, by the way. Here is the GPT-5 coverage. Excerpt:
Operationalizing Schumpeter: the Aghion–Howitt model (1992).
With Philippe Aghion, Howitt built a tractable model in which vertical, quality‑improving innovations drive growth but also destroy incumbents’ rents—formally embedding creative destruction in general equilibrium. The model delivered falsifiable predictions (e.g., cyclical equilibria, no‑growth traps, intertemporal “business‑stealing” incentives) and a normative agenda (balancing innovation incentives with obsolescence costs). It re‑centered long‑run growth on firm‑level R&D decisions and market structure rather than on exogenous technology.Competition and step‑by‑step innovation.
Subsequent work integrated IO with growth by allowing “neck‑and‑neck” rivalry and step‑by‑step catch‑up. The central empirical claim—an inverted‑U between product‑market competition and innovation—reconciles Arrow‑style replacement effects with escape‑competition effects and has been confirmed on rich panel data. This literature provided a bridge from theory to measurable policy levers (entry, pricing power, markups).
Here is GPT-5 with a detailed presentation of the Aghion-Howitt model, apologies for any errors but I could not do it better. Here is the Nobel Committee on Howitt.
How Immigration is Changing the Black-White Earnings Gap
We provide new evidence on earnings gaps between non-Hispanic White and three generations of Black workers in the United States during 1995-2024, using nationally representative data. Results reveal remarkable earnings advances among 2nd-generation Black immigrants, opposite to the well-documented widening in overall Black-White earnings gap. Among women, 2nd-generation Black workers have earnings higher than or equal to White women; among men, they earn 10% less at the median, but the gap vanishes at the top decile. The gap for 1st-generation Black men is shrinking, halving at the top decile; for 1st-generation Black women it shows initial widening then shrinking at the median. The native Black-White gap remains stubbornly high. Educational attainment largely drives 2nd-generation success, while residential patterns play a protective role for the 1st and 2nd generations. These findings provide critical data to set the record straight on the accomplishments of the highly successful and rising demography of Black immigrants and their US-born children.
That is from a new NBER working paper by Rong Fu, Neeraj Kaushal, and Felix Muchomba.
What matters for central banks?
This study examines the drivers of inflation levels, inflation variability, and growth variability collectively representing long-term central bank performance across 37 advanced economies in the Great Moderation era. A key finding is that central bank performance is consistently linked to the overall quality of institutions, while central bank-specific factors such as independence, exchange rate regimes, or inflation targeting show no significant impact. The analysis is extended to the 2022 inflation resurgence, using pre-2022 country characteristics. The results indicate that reliance on imports from Russia (likely gas) and its interaction with post-COVID GDP growth are the primary determinants, suggesting that the inflation surge was not a reversal of the Great Moderation.
That is from a new research paper by Livio Stracca.
Claims about education and convergence
This paper studies how human capital shapes the economic geography of development. We develop a model in which the cost of acquiring human capital varies across space, and regions with higher human capital innovate more. Locations are spatially connected through migration and trade. There are localized agglomeration economies, and human-capital-augmenting technology diffuses across space. Using high-resolution data on income and schooling, we quantify and simulate the model at the 1° x 1° resolution for the entire globe. Over the span of two centuries, the model predicts strong persistence in the spatial distribution of development — unlike spatial dynamic models without human capital, which predict convergence. Proportionally lowering the cost of education in sub-Saharan Africa or Central and South Asia raises local outcomes but reduces global welfare, whereas the same policy in Latin America improves global outcomes. An alternative policy equalizing educational costs across sub-Saharan Africa generates relatively worse outcomes, as population reallocates within the region toward less productive areas. Central to these results is the estimated negative correlation between the education costs and local fundamentals, as well as inefficiencies in the spatial allocation due to externalities.
That is I think a genuinely new idea? Here is the NBER working paper from
Hanson and Buterin for Nobel Prize in Economics
Intercontinental Exchange (ICE.N), the company that owns the NYSE exchange, just announced a $2 billion dollar investment in Polymarket, the Ethereum-blockchain based prediction markets platform. This is a tremendous milestone for prediction markets and for blockchains.
Shayne Coplan the founder of Polymarket writes:
The Polymarket origin story is funny because it’s a rare case of the dream being identical to how things played out. If I learned one thing, it’s that bold ideas are everywhere, hidden in plain sight. It just takes someone crazy enough to spend their life willing it into existence. That’s entrepreneurship: willing things into existence.
I remember reading Robin Hanson’s literature on prediction markets and thinking – man, this is too good of an idea to just exist in whitepapers. There were a million reasons why it shouldn’t work, countless arguments of why not to do it, and the odds were against us, but we had to try.
At the onset of the pandemic, I quite literally had nothing to lose: 21, running out of money, 2.5 years since I dropped out and nothing to show for it. But I knew we were entering an era where ways to find truth would matter more than ever, and Polymarket could play a critical role in that. After all, nothing is more valuable than the truth. It’s still a work in progress, but we’re honored to have made the impact we have thus far.
The NYSE will use Polymarket data to sharpen forecasts. The next step is decision markets. Futarchy, for example, just announced a prediction market in the value of Tesla shares if Musk’s compensation package is approved versus if it is not approved. Information like this can be used to improve decisions. To see how powerful this can be, broaden it to Hanson’s 1996 idea of a Dump the CEO Market, a market in the value of a company’s shares with and without the current CEO. Very powerful. And that is only the beginning.
In my 2002 book, Entrepreneurial Economics: Bright Ideas from the Dismal Science, which featured Robin’s paper on Decision Markets, I wrote
If Hanson is right about the benefits of decision markets, then perhaps one day, instead of quoting an expert, the New York Times editorial section will refer to the latest quote on “health care plan A” available in the business pages.
That day is upon us! It probably will not happen on Monday but it is time to give Robin Hanson, the father of prediction markets, and Vitalik Buterin, the co-father of Ethereum, a Nobel prize in economics for applied mechanism design.
Addendum: My a16z podcast with Scott Duke Kominers on prediction markets.
Is the earned income tax overrated?
This policy has been so popular with economists on a bipartisan basis, yet a recent piece in ReStud raises some doubts, as the wage subsidies induce many to drop out of school:
As a complement to the federal earned income tax credit (EITC), some states offer their own EITC, typically calculated as a percentage of the federal EITC. In this paper, we analyse the effect of state EITC on education using policy discontinuities at US state borders. Our estimates reveal that an increase in the state EITC leads to a statistically significant increase in the high school dropout rate. We then use a life-cycle matching model with directed search and endogenous educational choices, search intensities, hirings, hours worked, and separations to investigate the effects of EITC on the labour market in the long run and along the transitional dynamics. We show that a tax credit targeted at low-wage (and low-skilled) workers reduces the relative return to schooling, thereby generating a powerful disincentive to pursue long-term studies. In the long run, this results in an increase in the proportion of low-skilled workers in the economy, which may have important implications for employment, productivity, and income inequality. Finally, we use the model to determine the optimal design of the EITC.
That is by One simple lesson is that policy economics is often not easy. Via the excellent Kevin Lewis.
Share repurchases do not discourage investment
Theory tells us that, and the empirics tell us that too:
Our study examines the claim that share repurchases lead to reductions in real investments. Repurchase opponents argue that managers forego valuable investments to conduct opportunistic repurchases, while proponents argue that repurchases return excess cash to shareholders. We compare repurchasing firms’ real investments in capital expenditures, R&D, and employment to public and private non-repurchasing firms—holding constant their growth (i.e., investment) opportunity sets. Our results provide no support for the claim that repurchases lead to lower real investments. Consistent with these findings, we also show that financial analysts do not revise downward their capital expenditure forecasts following repurchases.
That is from a recent paper by Paul Brockman, Hye Seung (Grace) Lee, and Jesus M. Salas. You see the opposing argument in the media all the time, but it is wrong, wrong, wrong. As in “not correct.”
Via the excellent Kevin Lewis.
MR Podcast: Our Favorite Models, Session 1
The Marginal Revolution Podcast is back and this time Tyler and I discuss some of our favorite models or ways of thinking about the world. We begin with Spence on Monopolies, Harberger on Incidence and Solow on Growth. Here’s one bit:
TABARROK: You have an increase in the corporate tax. What happens?
COWEN: One lesson of the Harberger model is actually anything can happen. Who bears the burden? Is it capital, is it labor, or is it consumers? In the simplest versions of the model, what you have is both a substitution, capital versus labor in the taxed sector, and you have substitutions across sectors. You have a whole series of different effects. One of the first and simplest lessons from Harberger, which is really neat, but people just hadn’t gotten it before, is if you tax the corporate sector under a lot of reasonably general assumptions, the rate of return on capital goes down equally in both sectors, which to us is standard fare.
What will happen is capital flows out of the corporate sector into the noncorporate sector, that lowers the marginal rate of return on capital in the nontaxed sector, and simply the notion of capital can suffer in both sectors. Again, a revelation, maybe self-evident to us having written this principles textbook, but it shocked people. The partial equilibrium models never show that.
TABARROK: When you tax the corporations, you’re also taxing the mom-and-pops.
COWEN: And the nonprofits and whatever, wherever else the capital might flow.
TABARROK: Yes. This was one of the first useful applications of general equilibrium.
COWEN: That’s right. On that, it’s really held up. International affairs, one of the lessons is if you turn the other sector or add another sector that’s international, basically small economies cannot afford to tax capital at very high rates because so much of the capital will flow elsewhere.
TABARROK: Instead of it flowing to the noncorporate sector, it just flows out of the country.
COWEN: That’s right, which is like the other sector not affected by this particular tax. In 1962, a lot of small economies treated their capital very badly. Many still do, but there’s been a real revolution where even fairly statist economies—like the Nordics over time shifted to treating capital income pretty generously. Singapore would be another example. Again, it’s simple once you know it, but the Harberger model taught us that.
TABARROK: What about the labor margin?
COWEN: The debate since then has been how much of the tax is borne by capital and how much is borne by labor? On one hand, the Harberger model teaches you anything can happen. That’s useful intuitively. In fact, when you investigate it empirically, it’s what you would expect to happen that mostly happens. That is, capital does bear more of the tax than labor.
TABARROK: Labor bears a chunk.
COWEN: Yes. A typical estimate might be a third. There’s no free lunch from the point of view of labor. Furthermore, a lot of the capital is owned by labor through pension funds. If you take that into account, I don’t have an exact number for you, but I think it’s plausible to think labor might bear half the burden of the corporate tax. Again, you can show that pretty simply. The estimates are not exact, but just a big advance for economics. If you ask me, what ideas do I use all the time, that’s one of them.
The Harberger basic model, it doesn’t have land, but there’s the issue of what if you have three factors in the model, you would start with the Harberger model. If you’re a NIMBY who thinks there’s this kind of land monopoly in a city or land rents are very high because we stifle building, the incidence of a lot of taxes, even in general equilibrium models, can fall on the land for a city.
TABARROK: Yes, because the land can’t escape.
COWEN: That’s right.
TABARROK: As we say in the textbook, elasticity is equal to escape, right?
Here’s the episode. Subscribe now to take a small step toward a much better world: Apple Podcasts | Spotify | YouTube.
Sentences to ponder
To provide some sense of scale, that means the equivalent of about $1,800 per person in America will be invested this year on A.I.
Here is more from Natasha Sarin at the NYT.
The unraveling of Obamacare?
Paul Krugman has a recent post defending the exchange subsidies and tax credits that the Republicans wish to cut, talking with Jonathan Cohn about the “premium apocalypse” (and here). Whether or not one agrees with Krugman normatively, the arguments if anything convince me that Obamacare probably is not financially or politically stable.
To recap some history briefly:
1. Prior to passage, ACA advocates assured us that all three “legs of the stool” were necessary, most of all the mandate, to prevent adverse selection and skyrocketing premia. That argument made sense and was accepted by most economists, whether or not they favored ACA.
2. Obamacare passes by razor-thin margins, with a mandate.
3. The mandate proves extremely unpopular. Whether or not it is efficient, it puts a disproportionate share of the cost burden on other policy purchasers through the exchanges. The Republicans run against ACA and make some big gains.
4. Trump in essence “saves” Obamacare by in essence defusing enforcement of the mandate. The people who hated paying the very high premia could now back out of the system without getting into real trouble. As a result, much of the opposition to Obamacare, and the scare stories about expensive policies, dissipates.
5. Contrary to the predictions of the economists, Obamacare does not collapse. Enough people kept on signing up, perhaps because there is often a fair degree of “positive selection” into insurance coverage. Still, one has to wonder whether this will last.
6. Under the Biden administration, the Democrats support the continuation of premium support, but not with massive enthusiasm. It is expensive, though of course the Democrats did understand this is a centerpiece of Obamacare and they cannot give up on it. If you are calling the current situation a “premium apocalypse,” a lot of money has to be involved.
7. Putting aside the current Trump plans and the government shutdown and concomitant fight, how stable is this budget allocation over time? Is it possible that the economists (including Krugman and David Cutler) were right all along, albeit with a long lag, and the exchanges ultimately cannot work without a mandate? And that the premium support will just get more and more expensive?
It seems to be this scenario, while hardly proven, is really quite possible. One can blame Trump of course, but maybe the allocation no longer is sustainable over the medium term?
During the ACA debates, Megan McArdle frequently made the point that such a big policy passed by such small margins could not so easily last. A lot of people wanted to look past that observation, but was she so wrong?
Addendum: By the way, how are we supposed to pay for all of this? Repealing the recent Trump tax cuts and raising taxes on the rich doesn’t seem to come close to bringing the budget into balance. Endorse a VAT if you wish, but then do so! And let us have that debate. In the meantime everyone is just playing games with us.