Category: Economics

Large Firms in the South Korean Growth Miracle

We quantify the contribution of the largest firms to South Korea’s economic performance over the period 1972-2011. Using firm-level historical data, we document a novel fact: firm concentration rose substantially during the growth miracle period. To understand whether rising concentration contributed positively or negatively to South Korean real income, we build a quantitative heterogeneous firm small open economy model. Our framework accommodates a variety of potential causes and consequences of changing firm concentration: productivity, distortions, selection into exporting, scale economies, and oligopolistic and oligopsonistic market power in domestic goods and labor markets. The model is implemented directly on the firm-level data and inverted to recover the drivers of concentration. We find that most of the differential performance of the top firms is attributable to higher productivity growth rather than differential distortions. Exceptional performance of the top 3 firms within each sector relative to the average firms contributed 15% to the 2011 real GDP and 4% to the net present value of welfare over the period 1972-2011. Thus, the largest Korean firms were superstars rather than supervillains.

That is from a new NBER working paper by Jaedo Choi, Andrei A. Levchenko, Dimitrije Ruzic, and Younghun Shim.

Agricultural Productivity in Africa

If you look at total output, Peter Coy notes that sub-Saharan Africa looks quite impressive with gains in total output exceeding that in the rest of the world.

A chart showing the change in value of agricultural output adjusted for inflation in sub-Saharan Africa and the world.

But almost all of this has come from using more inputs, especially land. If you look at output per unit of input, i.e. total factor productivity (TFP) then sub-Saharan Africa not only trails the rest of the world, it’s falling behind.

A chart showing the change since 1961 in agricultural productivity, accounting for all inputs including land and labor, in the world and sub-Saharan Africa.

Things get much worse if you look at agricultural productivity by country. Alice Evans points us to “the most important graph” from work by Suri et al. (2024) which shows shockingly that since ~2010 agricultural productivity has plummeted in many African nations. I found this graph hard to believe.

The numbers are correct based on data from the USDA but digging deeper, I noted that the two worst performing countries are Djibouti and Botswana–two small countries where agriculture is less than 5% of GDP and where climate and land mean that agriculture has no hope of ever being a great success. Moreover, Djibouti is growing rapidly and Botswana is a middle-income country with a booming economy. I suspect that what is going on here is that a growing economy is pulling the best (unmeasured) people and resources out of agriculture which leads what was already a small sector to become less productive on paper, albeit at no great loss to the economy.

In contrast, the countries where Ag TFP is rising the most are Zimbabwe and Senegal where agriculture is a much larger share of GDP and employment (Zimbabwe ~11-14% of GDP, 70% of employment and Senegal 16% of GDP, 30% of employment). So the good news is that agricultural productivity is growing in places where it is important.

Bottom line is that agricultural productivity in Africa is low. I see the primary cause as being small firms which means there are few opportunities for economies of scale, mechanization and R&D (see Suri et al. (2024) for a longer discussion.). Climate change is a threat and developing climate-resistant crops, especially for Africa where heat stress will become increasingly important, has high potential returns.

Overall, however, my conclusion is that although agricultural productivity in Africa is low and there are threats on the horizon the situation is getting modestly better rather than dramatically worse.

Incentives matter, for childbirth too

That is the topic of my latest Bloomberg column, here is one bit:

There is in fact a pronounced “baby bump” in December. The numbers show that induced deliveries and scheduled Caesarian section deliveries are higher than average toward the very end of the year.

Why? In the US, there are significant tax advantages to having a child. If you are a single parent with an adjusted gross income below $112,500, an extra child brings you a $3,600 child tax credit per year.

So — speaking strictly about the tax implications, of course — a New Year’s Eve baby is better than New Year’s baby: You can claim that little bundle of joy as a dependent for the entire year, even though they were only there for a day of it. Yet further benefits could come from state-level earned income tax credit and child tax credit programs.

You might argue that the parents, not the kids, gain the most from these tax benefits. You might also ask if there are some costs to these newly born children. In fact, the study shows that these children have lower birthweights. Further research shows that the accelerated births had noticeable impacts on the children, again finding lower birthweights.

The good news, however, is that those same kids have accelerated weight gains over the course of subsequent examinations. The further good news is that those children reach early development milestones at a faster pace than average. That may reflect the extra income the parents have, since higher income and other positive parental features do predict better developmental outcomes for the kids.

Don’t wait until April!

Time Preference, Parenthood and Policy Preferences

Using a small sample of couples before and after they have children, Alex Gazmararian finds that support for climate change policy increases after people have children. People also become more future-orientated when primed to think of children.

The short time horizons of citizens is a prominent explanation for why governments fail to tackle significant long-term public policy problems. Actual evidence of the influence of time horizons is mixed, complicated by the difficulty of determining how individuals’ attitudes would differ if they were more concerned about the future. I approach this challenge by leveraging a personal experience that leads people to place more value on the future: parenthood. Using a matched difference-in-differences design with panel data, I compare new parents with otherwise similar individuals and find that parenthood increases support for addressing climate change by 4.3 percentage points. Falsification tests and two survey experiments suggest that longer time horizons explain part of this shift in support. Not only are scholars right to emphasize the role of individual time horizons, but changing valuations of the future offer a new way to understand how policy preferences evolve.

It’s a little tricky to say that the driving force is time preference per se, maybe it’s just caring about (some) future people. Suppose a white man marries an African American woman. He subsequently may become more interested in civil rights, just as having children may make people more interested in the(ir) future. Or suppose that medical technology extends life expectancy, leading people to save more. Is this due to lower time preference or increased-self love?

We do see more parenthood driving future-oriented behavior on many margins. I am reminded, for example, of More Pregnancy, Less Crime which showed huge drops in criminal activity as people learn that they will be mothers and fathers. Criminals are very present-oriented so this effect is also consistent with parenthood driving lower time preference, although other stories are also possible. It’s difficult to distinguish these explanations and as far as policy and behavior is concerned perhaps the distinction between caring about the future and caring about future people doesn’t really matter.

*Emergency Money*

The author is Tom Wilkinson, and the subtitle is Notgeld in the Image Economy of the German Inflation, 1914-1923.  Notgeld, or emergency money, typically was privately issued to make up for the deficiencies of government money during that period.

It is hard to think of a book that is more “for me.”  The book covers history, monetary economics, private currency issuance, and the artistic renderings put on the private notes.  You can see plenty of desperation in those visuals, and clearly the 19th century seems like a long time ago.  I read this one right away upon arrival.

You can buy it here.  Here is a good short piece on the art.

What should I ask Nate Silver?

Yes, I will be doing another Conversation with Nate, based in part on his new and forthcoming book On the Edge: The Art of Risking Everything (I have just started it, but so far it is very good, dealing with issues of poker and also risk-taking more generally).

Here is my previous Conversation with Nate Silver.  And please note I am not looking to ask him about the election.  So what should I ask?

Deep roots, the persistent legacy of slavery on free labor markets

To engage with the large literature on the economic effects of slavery, we use antebellum census data to test for statistical differences at the 1860 free-slave border. We find evidence of lower population density, less intensive land use, and lower farm values on the slave side. Half of the border region was half underutilized. This does not support the view that abolition was a costly constraint for landowners. Indeed, the lower demand for similar, yet cheaper, land presents a different puzzle: why wouldn’t the yeomen farmers cross the border to fill up empty land in slave states, as was happening in the free states of the Old Northwest? On this point, we find evidence of higher wages on the slave side, indicating an aversion of free labor to working in a slave society. This evidence of systemically lower economic performance in slavery-legal areas suggests that the earlier literature on the profitability of plantations was misplaced, or at least incomplete.

That is from a new NBER working paper by Hoyt Bleakley and Paul Rhode.

How the German welfare state punishes performance

The German welfare state is generous but this leads to implicit tax rates for those on welfare that can exceed 100%. Here’s a useful summary from the German newspaper Handelsblatt. (The original is in German, this is a Google translation.)

Poorly coordinated state benefits such as the citizen’s allowance, housing benefit or child allowance often mean that additional work is not worthwhile or, in extreme cases, even leads to lower net income. The Ifo Institute has calculated this for various household types for the Handelsblatt newspaper – and shown how anti-performance the system sometimes is.

..A dual-income couple with two children aged five and nine, who work full-time and each earn 2000 euros gross per month, have a net income of 2686 euros with rent and heating costs of 1235 euros.

The couple therefore only has 887 euros more at their disposal per month than the household receiving citizen’s allowance. The absurd thing is that if the model working couple increases their joint income to 5,000 euros, the household’s net income falls by 43 euros to 2,643.

The graph shows that from a gross monthly income of 2000 Euro ($2150) (gray bars) to 6000 Euro ($6450) the net income gradient (orange bars) is nearly flat and in some regions it actually falls–meaning the couple would be better off by not working.

It’s hard to solve these problems. A negative income tax in which benefits would fall more slowly with income can restore incentives but at the price of having many more people on some welfare and a a much higher budgetary cost.

How we should update our views on immigration

I am writing this post on a somewhat bumpy plane ride, so I will try doing it without links.  Most of the relevant sources you can find through perplexity.Ai, or even on MR itself.  Google too.

Overall, I am distressed by the contagion effects when it comes to immigration views.  A large number of people are much more anti-immigration than they used to be, in part because yet others are more anti-immigration.  All sorts of anecdotes circulate.  But let’s look more systematically at what we have learned about immigration in the last ten years or so.  Not all of it should count as pro-immigration, but a lot of it should, with one huge caveat.

When it comes to the wage effects of immigration, there is very modest additional evidence in the positive direction.  I wouldn’t put much weight on that, but it certainly is not pointing in the other direction.

The United States is showing it can have a higher stock of immigrants and also falling crime rates.  I am not suggesting a causal model there, but again that should be more reassuring than not.

There is additional evidence for the positive fiscal benefits of immigrants, including less skilled immigrants.  Some of this is from the CBO, some of it I outlined in a Bloomberg column maybe a month or so ago.  I don’t view those results as major revisions, but again they are not pointing in the wrong direction.

There is reasonable though not decisive macroeconomic evidence that immigrant labor supply was a significant contributor to America’s strong post-pandemic recovery.

If you are a right-winger who was worried that incoming Latinos would vote Democratic in some huge percentage, you can set your mind at ease on that one.  You also can take this as evidence of a particular kind of assimilation.

Fertility rates are falling much more than we had expected, including in the United States.  This makes the case for immigration much stronger.

It is increasingly evident that immigrant-rich Florida and Texas are doing just great.  The picture is decidedly less positive for many parts of California, but I suppose I see evidence that the white Progressive Left is mainly at fault there, not the immigrants. Still, I do think you can make a reasonable argument that immigrants and the Progressive Left interact in a dysfunctional manner.  It is no surprise to me that so many of the leading anti-immigrant voices come from California.

Overall, I am struck by the fact that immigration critics do not send me cost-benefit studies, nor do they seem to commission them.  If the case against immigration is so strong, why aren’t these studies created and then sent to me?  You could have a good one for a few hundred thousand dollars, right?  Instead, in my emails and the like I receive a blizzard of negative emotion, and all sorts of anecdotal claims about how terrible various things are, but never a decent CBA.  I take that to be endogenous.  I think it is widely accepted that America having taken in the people who are now Italian-Americans would pass a cost-benefit test, even though the Mafia ruled New Jersey and Rhode Island for decades.  Somehow people are less keen to apply this same kind of reasoning looking forward, though they are happy to regale you with tales of crimes by current immigrants.

I do see good evidence that trust in American government is falling, but I attribute that mainly to the Martin Gurri effect.  I mean look at the current gaslighters in the White House and in the media — they are not primarily immigrants, quite the contrary.  Or all the Covid mistakes, were they due to “the immigrants”?  I don’t see it.

Now let us look at knowledge updates on the other side of the ledger, namely new knowledge that should make us more skeptical about immigration.

We now see that external hostility to Israel and Taiwan is stronger than we had thought.  So the case for a looser immigration policy in Israel is much weaker than it used to be.  As for Taiwan, they should be more careful about letting in mainland Chinese.  Estonia needs to be more wary about letting in Russians, and indeed they are.  And there might be other countries where this kind of logic applies.  Do I really know so much about the situation between Burundi and Rwanda?  In general, as the level of conflict in the world rises, there will be more of these cases.  It is also a major consideration for anywhere near Ukraine.  Small countries need to worry about this most of all.

I should note this problem does not seem to apply to North America, though you might require tougher security clearances for some jobs currently held by Chinese migrants.

The second issue, and it is a biggie, is that voters dislike immigration much, much more than they used to.  The size of this effect has been surprising, and also the extent of its spread.  I am writing this post on Election Day in France, and preliminary results suggest a very real risk that France ends up ungovernable.  Immigrants are clearly a major factor in this outcome, even under super-benign views that do not “blame” the immigrants themselves at all.

Versions of this are happening in many countries, not just a few, and often these are countries that previously were fairly well governed.

I think it is better for countries in such positions to be much tougher on immigration, rather than to suffer these kinds of political consequences.

But let’s look honestly at the overall revision to our views.  Politics is stupider and less ethical than before, including when it comes immigration (but not only!  Fellow citizens also have become more negative about other fellow citizens of differing views, and I view negativism as the root of the problem all around).  We need to take that into account, and so all sorts of pro-migration dreams need to be set aside for the time being, at least in many countries.  Nonetheless the actual practical consequences of immigration, political backlash excluded, are somewhat more positive than we had thought.  For some smaller countries, however, that may not hold, Israel being the easiest example to grasp but not the only.  In the longer run, we also would like to prepare for the day when higher levels of immigration might resume, even if that currently seems far off.  So we shouldn’t talk down immigration per se.  Instead we should try to combat excess negativism in many spheres of life.

Somehow that view is too complicated for people to process, and so instead they instinctively jump on the anti-immigration bandwagon.  Too much negativism.  But in fact my view is better than theirs, and so they ought to hold it.

The Gary Becker Papers

The Gary Becker Papers (117.42 linear feet, 223 boxes) are now open at the University of Chicago:

The collection documents much of Gary Becker’s intellectual history. One of his autobiographical essays, “A Personal Statement About My Intellectual Development” (see Box 120, Folder 10 and Box 189, Folder 1), traces his academic career from his youth to his origins as a student at Princeton University, to his graduate student years and professorship at the University of Chicago, and his extra collegial engagement on corporate advisory boards, political participation, and governmental councils. The essay could have been written based on some of the records collected here. The collection documents an intellectual trajectory primarily through intellectual productions, research files, and communications. His approach to the research and writing, his publishing history, his engagement with others in the field of economics and other individuals in public service and global politics are contained here. Though the collection primarily concerns his professional life, there is also mention of his relationship with Guity Nashat, his wife, as they traveled together to the many conferences and events in the United States and abroad, and other incidents of his life for a minor study or treatment of his biography.

The collection materials include Becker’s handwritten and printed copies of his scholarship, including notes (and bibliographic cards), papers (and drafts), diagrams and charts, data sheets, correspondence, periodical reprints, magazines, newspapers and clippings, grant documents, reports, referee files, course and instructional materials, photographs, VHS tapes, DVD’s, and related ephemera.

Hat tip: Peter Istzin.

Economic valuation of becoming a superhero

Have you ever wished that you were a superhero? If so, how much would you be willing to pay to become one? In this study, we measured the economic value of becoming a superhero or obtaining a superpower using a discrete choice experiment. We focused on four superpowers: mind-control, flight, teleportation, and supernatural physical strength and measured values for each power. Our results indicate that of the four powers, our participants valued teleportation the most.

That is from a newly published paper by Julian J. Hwang and Dongso Lee.  Via John Whitehead.

What should I ask Kyla Scanlon?

Yes I will be doing a Conversation with her.  Here is a reprise of an MR post reviewing her new book In This Economy;

“The subtitle is How Money & Markets Really Work.  I am a big fan of Kyla Scanlon (see the link for her other work), who is a force of nature.  She graduated from Western Kentucky University in 2019, and she has a new and very effective approach to how to talk.  I first learned of her through her explanatory videos, and it turns out she does one almost every day.

Apart from being very well done, this economics book has two notable features.  First, it elevates Kyla’s notion of “vibes” as a significant determinant of economic activity.  I use the older (and less vibey) terminology of “cultural contagion,” but in any case I consider this a neglected and under-analyzed set of forces, including in the economic realm.

Second, this is the first popular economics book I have seen that takes 2024 seriously.  Imagine you trained a “large language human” on what people actually talk and worry about today, and set that human loose to write an economics book.  This is what you would get.  It is a good and bracing shock to those who have trained their memories on some weighted average of the more distant past.

As an aside, here are some of Kyla’s favorite poems.  Why are there no major MSM profiles of her?”

So what should I ask?

Milei update

Complicating the recovery is the overvalued peso, which is making the country unjustifiably expensive in dollar terms. The official exchange rate is currently set by the government, which also imposes capital controls. Almost all of the devaluation in December has been eroded (see chart 2). It involved initially devaluing the peso by over 50% and then by 2% each month. But monthly inflation has been greater than the crawling peg. The result is that the real effective exchange rate is rising.

The effects are obvious from atop the Andes. On a single long weekend in April some 40,000 Argentines crossed the mountains into Chile to buy everything from trainers to car tyres because, surreally, Chile has become cheaper than Argentina. Mr Milei slams those who say the peso is overvalued as “intellectually dishonest”. Yet when an Argentine president says there won’t be a devaluation, taxi drivers know there is a good chance there will be one, quips Nicolás Gadano of Empiria Consulting in Buenos Aires.

A pricey peso scares off tourists, makes exports expensive and deters investors. An overvalued currency often eventually crashes. “If you see Argentina appreciating, this is always a sign of worse things to come,” says Eduardo Levy Yeyati of Torcuato Di Tella University in Buenos Aires. Falling exports make it harder for the central bank to accumulate dollars, which it needs to pay off foreign debts and to build up its safety buffers.

The government could allow the peso to float or accelerate the 2% crawling peg. But either would probably push up inflation, thus endangering Mr Milei’s popularity and undermining some of the benefits of the devaluation. For now, Mr Milei is able to keep a tight grip on the exchange rate because of capital controls.

What happens next? Mr Milei has promised to ultimately remove capital controls as part of his plan to restore investor confidence. He insists that inflation will soon be 2% a month, the same as the rate of devaluation. This, he says, would allow him to slowly ease the restrictions and float the peso without its value plunging.

Here is more from The Economist.  File under “difficult balancing act, nor is this market prices working their magic.”

My very good Conversation with Joseph Stiglitz

Here is the audio, video, and transcript.  Here is the episode summary:

Nobel Prize-winning economist Joseph Stiglitz joined Tyler for a discussion that weaves through Joe’s career and key contributions, including what he learned from giving an 8-hour lecture in Japan, how being a debater influenced his intellectual development, why he tried to abolish fraternities at Amherst, how studying Kenyan sharecropping led to one of his most influential papers, what he thinks today of Georgism and the YIMBY movement, why he was too right-wing for Cambridge, why he left Gary, Indiana, his current views on high trading volumes and liquidity, the biggest difference between him and Paul Krugman, what working in Washington, DC taught him about hierarchies, what he’ll do next, and more.

Here is one excerpt:

COWEN: You were a debater, and when you were at Amherst, you were also head of student government, right?

STIGLITZ: That’s right.

COWEN: You voted to abolish fraternities. Isn’t there good evidence that fraternities raise wages?

STIGLITZ: [laughs] That was unions raise wages. Fraternities — I was opposed to fraternities because Amherst was a small college, a thousand boys, men, and they had the effect of dividing the community. The philosophy that had was that we should be one community. The fraternities tended to interfere with that. Students from one fraternity would always sit at dinner at the same tables with the members of their fraternity. There were class aspects of fraternities.

They were just, I thought, very divisive in a small community, and it turned out that my perspective eventually prevailed. A number of years later, Amherst did abolish the fraternities. It’s an important lesson to me in my political life. Sometimes you begin a campaign knowing that in the next year, two years — while you’re actually there — you may not succeed, but sowing the seeds of discussion, debate, maybe in 5, sometimes 10, sometimes 15, 20 years, things turn out and you wind up winning the debate.

And this:

COWEN: Do you favor the deregulations of the current YIMBY movement — allow a lot more building?

STIGLITZ: No. That goes actually to one of the themes of my book. One of the themes in my book is, one person’s freedom is another person’s unfreedom. That means that what I can do . . . I talk about freedom as what somebody could do, his opportunity set, his choices that he could make. And when one person exerts an externality on another by exerting his freedom, he’s constraining the freedom of others.

If you have unfettered building — for instance, you don’t have any zoning — you can have a building as high as you want. The problem is that your high building deprives another building of light. There may be noise. You don’t want your children exposed to, say, a brothel that is created next door. In the book, I actually talk about one example. Houston is a city with relatively little zoning, and I have some quotes from people living there, describing some of the challenges that that results in.

And this;

COWEN: Your 1984 piece with Carl Shapiro on efficiency wage theory — looking back at that now, 40 years later, you think of that mainly as a contribution to understanding organizations, an explanation of unemployment, a claim about sticky wages? Or how do you frame that article? Because in the piece itself, the wage is actually flexible, at least the real wage is.

Recommended, interesting throughout.

Nuclear is Not Best Everywhere

Australia is having a debate over nuclear power. Hamilton and Heeney weigh in with an important perspective:

On the basis of many conversations about Australian energy policy over the years, we can divide the proponents of nuclear energy into three groups.

The first might be called the “ideologues”. They favour nuclear not because of its zero emissions, but despite it. Indeed, many are climate sceptics. They hate renewables because the left loves them, and they favour nuclear because the left hates it.

The second might be called the “engineers”. They favour nuclear energy because it’s cool. Like a Ferrari, they marvel at its performance and stability. They see it as the energy source of the future. The stuff of science fiction.

The third might be called the “pragmatists”. They are not super attentive or highly informed about the intricacies of energy policy. They superficially believe nuclear can serve as a common-sense antidote to the practical shortcomings of renewables.

Conspicuously absent are those who might be called the “economists”. They couldn’t care less about exactly how electrons are produced. They simply want the cheapest possible energy that meets a minimum standard of reliability and emissions.

On the basis of the economics, Hamilton and Heeney conclude that nuclear is expensive for Australia:

The CSIRO estimates the cost of 90 per cent renewables, with firming, transmission, and integration costs included, at $109 per megawatt hour. Based on South Korean costs (roughly one-third of the US and Europe), a 60-year lifespan, a 60 per cent economic utilisation rate (as per coal today), and an eight-year build time (as per the global average), nuclear would cost $200 per megawatt hour – nearly double.

The same electrons delivered with the same reliability, just twice as expensive under what is a fairly optimistic scenario.

Note–this is taking into account that nuclear is available when the sun doesn’t shine and the winds don’t blow–so are batteries.

I suspect that Hamilton and Heeney are right on the numbers but it’s this argument that I find most compelling:

If you need external validation of these basic economics, look no further than the opposition’s own announcement. Rather than lift the moratorium and allow private firms to supply nuclear energy if it’s commercially viable, the opposition has opted for government to be the owner and operator. A smoking gun of economic unviability if ever there were one.

I am optimistic about the potential of small modular reactors (SMRs) based on innovative designs. These reactors can ideally be located near AI facilities. As I argued in the Marginal Revolution Theory of Innovation, innovation is a dynamic process; success rarely comes on the first attempt. The key to innovation is continuous refinement and improvement. These small reactors based on different technologies give as an opportunity to refine and improve. To achieve this, we must overhaul our regulatory framework, which has disproportionately burdened nuclear energy—our greenest power source—with excessive regulation compared to more hazardous and less environmentally friendly technologies.

Electrons are electrons. We should allow all electricity generation technologies to compete in the market on an equal footing. Let the best technologies win.