We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income.
That is from Ying Feng, David Lagakos, and James E. Rauch. In their core model, reallocating low-education workers to the formal sector makes them harder to reemploy at short notice, in contrast to the informal sector and self-employment. An alternative view, not mutually exclusive, is that in poor societies low-education workers simply have to take jobs, due to extreme need.
You will on Twitter, and in blogs, see various attempts to mock supply-side theories by showing increasing employment, often accompanied by remarks such as “I didn’t know video games were getting so much worse.” Such comments are a mistake and a misunderstanding. Proper supply-side theories do not deny the relevance of the demand-side, and so nor should demand-side theories deny the relevance of the supply-side. It is possible to believe both “supply-side factors made the labor market recovery slower than usual,” and “demand-side forces have at this moment overcome many of those problems.” Just look at the disability rolls. The ability to receive disability kept many people out of the labor force in earlier years, slowing down labor market recovery. Yet it is also true that currently demand-side forces are creating jobs good enough that many of those same people finally are leaving the disability rolls.
The deeper lesson of course is that — outside of the short-run — demand-side forces are supply-side forces. And right now we are out of the short run indeed, at least when it comes to macroeconomic shocks.
Soon I will be having a Conversation with my esteemed colleague John V. Nye, one of the smartest people I know. John is an economic historian but also a polymath with broad-ranging interests, including travel, classical music, chess, education, “institutions,” Asian food, the Philippines (his home country), and much more.
So what should I ask him?
We estimate that over a typical U.S. monetary easing cycle, EME [emerging economy] borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance.
This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.
That is from a new NBER working paper by Falk Bräuning and Victoria Ivashina.
I thank all of you buyers and reviewers for making the opening week of Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals such a success.
The book hit #1 in 4 Amazon browse subcategories over the last week:
– Theory of Economics, and also Comparative Economics
That is the topic of my latest Bloomberg column, note I am continuing to see a larger backlash on the Saudi issue than one might have expected. The bigger underlying question is this: given all that has happened, so why is the United States still such an ally of the Saudis? It’s longstanding and thus not just about Trump’s possible business dealings. It’s also not just about the oil, here is one excerpt:
One feature of the geography of Saudi Arabia is that its major oil fields stand apart and can be taken over without controlling the major Saudi cities. That is one reason why the Saudis were so wary of Saddam Hussein.
That risk means the Saudis are especially dependent on American military protection. In turn, the U.S. knows it has a lot of leverage over the Saudis, and therefore making deals with the Saudis involves easier enforcement and lower transaction costs. The same cannot be said of deals with Iran. So in the Saudi-Iran rivalry, the U.S. ends up siding with the Saudis.
Historically, Iran has been a very difficult country to capture or control, and the population has fought fiercely to defend Iranian territorial integrity. Iran doesn’t need American protection to the same degree as do the Saudis, and so Iran is more willing to be prickly or openly hostile to the U.S.
Iran shared a border with the former Soviet Union (though not Russia) and shares Caspian Sea rights with Russia, and the two countries often have had close and cordial relations. Iran also is easier than Saudi Arabia for China to reach with its One Belt, One Road initiative, which aims to build close ties with the countries to its west. In sum, Iran is going to diversify its geopolitical bets, which pulls it away from the U.S., even if the issues surrounding nuclear weapons and support for terrorism somehow were resolved.
Of course, the Saudis have abused their position. They are dependent on the U.S., but they also know America has few other potential regional partners for cooperation on such a large scale. And so the Saudis have engaged in human-rights abuses over the decades, figuring it may harm but will not irrevocably damage relations with America.
There is more at the link, analytical throughout.
This was for Mark Lutter’s Center for Innovative Governance Research.
The IDEAL policy creates a long-term visa program in which 3mm immigrants are selected to live in the U.S. per year.
The IDEAL policy is simple and includes the following details:
- Immigrants pay $30,000 for a five-year live/work visa renewable for an additional five years at no additional cost contingent upon each IDEAL immigrant proving to be a net asset to the U.S. economy.
- At the end of ten years, immigrants whose impact to the U.S. is net positive are eligible for citizenship. Immigrants with a net negative impact will be asked to leave the U.S. Acceptance and impact will be determined by a pre-determined scoring system.
- IDEAL visa-holders are ineligible for any government benefits until attaining full citizenship and IDEAL visa-holders will be required to secure health insurance through an employer or through other means during those ten years.
Each applicant is given an acceptance score and ranking based on the following criteria:
- Education level;
- English language proficiency;
- Existing job offers from one or more U.S. companies;
- Previous successful U.S. work history; and
- Willingness to live in a IWC (Immigrant Welcoming Community).
An Immigrant Welcoming Community meets all of the following criteria:
- An urban or rural community in the bottom 25% of U.S. income;
- A community that has suffered population losses over the preceding decade; and
- A community that opts-in to the IDEAL program via local government consent.
Here is the full website.
Using a household model of mortgage prepayment with endogenous mortgage pricing, wealth distributions and consumption matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that the ability to stimulate the economy by cutting rates depends not just on the level of current interest rates but also on their previous path: 1) Holding current rates constant, monetary policy is less effective if previous rates were low. 2) Monetary policy “reloads” stimulative power slowly after raising rates. 3) The strength of monetary policy via the mortgage prepayment channel has been amplified by the 30-year secular decline in mortgage rates. All three conclusions imply that even if the Fed raises rates substantially before the next recession arrives, it will likely have less ammunition available for stimulus than in recent recessions.
That is from David W. Berger, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra, via the excellent Kevin Lewis.
A new paper in Science adds support to the so-called gender-equality paradox. Using a survey of some 80,000 people across 76 countries Falk and Hermle find that for a variety of preferences the differences between the genders gets larger the greater is economic development and gender equality. The basic story is here:
As the authors put it:
In sum, greater availability of material and social resources to both women and men may facilitate the independent development and expression of gender-specific preferences, and hence may lead to an expansion of gender differences in more developed and gender-egalitarian countries.
As I pointed out in my post, Do Boys Have a Comparative Advantage in Math and Science? results like this can explain why there are proportionately fewer women entering STEM fields in richer and more gender-equal countries than in poorer and less gender-equal countries.
One point which many people are missing is that small but growing gender differences with development are only one minor effect of a much bigger phenomena. In a primitive economy, everyone does more or less the same thing, subsistence farming. Only in a market economy under the division of labor can people specialize. Specialization reflects and amplifies diverse personalities and interests. People sometimes complain about “excess” variety in a market economy but do they extend that complaint to careers, arts, and lifestyles? In a market society we get Corn Flakes, Frosted Flakes and Coconut Flakes and we get cardiologists, dermatologists and otolaryngologists and we get Chicago Blues, dub step, and K-Pop and we also get a flowering of sexual preferences and lifestyles. As Mises once said the very idea of personality as we know it today is a result of the market economy. The small gender differences some people focus on are merely the averaging by gender of much larger individual differences. Thus, I would revise the authors:
In sum, greater availability of material and social resources facilitates the independent development and expression of individual-specific preferences, and hence may lead to an expansion of individual differences in more developed and equal-opportunity countries.
I will be having a Conversation with him on November 12, unfortunately the GMU event is already sold out. In the meantime, what do you suggest? What should I ask him?
Lant Pritchett’s new working paper, “Alleviating Global Poverty: Labor Mobility, Direct Assistance, and Economic Growth” should be required reading for every Effective Altruist. Bottom line: Virtually all poverty reduction comes from economic growth and migration – not redistribution or philanthropy.
That is from Bryan Caplan.
In his influential 1997 paper, Divergence, Big Time, Lant Pritchett estimated:
…that from 1870 to 1990 the ratio of per capita incomes between the richest and the poorest countries increased by roughly a factor of five and that the difference in income between the richest country and all others has increased by an order of magnitude.
Pritchett was correct but Patel, Sandeful and Subramanian show that just where Pritchett’s study ended, convergence began!
While unconditional convergence was singularly absent in the past, there has been unconditional convergence, beginning (weakly) around 1990 and emphatically for the last two decades.
The figure above plots the coefficient (“beta”) from the plain vanilla unconditional convergence regression (relating average growth of real per capita GDP over the long run to its initial level). A statistically significant negative beta denotes convergence and divergence otherwise. Since we know from Johnson et al. (2013) that growth rates vary widely across datasets, we plot the annual betas for three such sets: the Penn World Tables (PWT), the World Development Indicators, and the Maddison Project (Bolt et al. 2014). While the point estimates vary across datasets, the consistent pattern across them all is a statistically significant negative beta since around 1995 (unconditional convergence) and its lack prior to that (see also Roy, Kessler and Subramanian, 2016).
Our basic point doesn’t require regressions. Looking at the 43 countries the World Bank classified as “low income” in 1990, 65 percent have grown faster than the high-income average since 1990. The same is true for 82 percent of the 62 middle-income countries circa 1990.
Neo-liberalism has been incredibly successful, essentially delivering on all of its promises of economic growth, declines in poverty, and peace. Yet, the ideas behind what Andrei Shleifer called The Age of Milton Friedman are now under attack and in retreat.
This paper provides a quantitative analysis of the effects of the law and economics movement on the U.S. judiciary. Using the universe of published opinions in U.S. Circuit Courts and 1 million District Court criminal sentencing decisions linked to judge identity, we estimate the effect of attendance in the controversial Manne economics training program, an intensive two-week course attended by almost half of federal judges. After attending economics training, participating judges use more economics language, render more conservative verdicts in economics cases, rule against regulatory agencies more often, and render longer criminal sentences. These results are robust to adjusting for a wide variety of covariates that predict the timing of attendance. Comparing non-Manne and Manne judges prior to program start and exploiting variation in instructors further assuage selection concerns. Non-Manne judges randomly exposed to Manne peers on previous cases increase their use of economics language in subsequent opinions, suggesting economic ideas diffused throughout the judiciary. Variation in topic ordering finds that economic ideas were portable from regulatory to criminal cases.
That is from Elliott Ash, Daniel L. Chen, and Suresh Naidu, via Rethinking Economics and also S.
This was two and a half hours (!), and it is a special bonus episode in Conversations in Tyler, here is the text and audio. The starting base of the discussion was my new, just today published book Stubborn Attachments: A Vision of a Society of Free, Prosperous, and Responsible Individuals, but of course we ranged far and wide. Here are a few excerpts:
WIBLIN: Speaking of Tetlock, are there any really important questions in economics or social science that . . . What would be your top three questions that you’d love to see get more attention?
COWEN: Well, what’s the single question is hard to say. But in general, the role of what is sometimes called culture. What is culture? How does environment matter? I’m sure you know the twin studies where you have identical twins separated at birth, and they grow up in two separate environments and they seem to turn out more or less the same. That’s suggesting some kinds of environmental differences don’t matter.
But then if you simply look at different countries, people who grow up, say, in Croatia compared to people who grow up in Sweden — they have quite different norms, attitudes, practices. So when you’re controlling the environment that much, surrounding culture matters a great deal. So what are the margins where it matters and doesn’t? What are the mechanisms? That, to me, is one important question.
A question that will become increasingly important is why do face-to-face interactions matter? Why don’t we only interact with people online? Teach them online, have them work for us online. Seems that doesn’t work. You need to meet people.
But what is it? Is it the ability to kind of look them square in the eye in meet space? Is it that you have your peripheral vision picking up other things they do? Is it that subconsciously somehow you’re smelling them or taking in some other kind of input?
What’s really special about face-to-face? How can we measure it? How can we try to recreate that through AR or VR? I think that’s a big frontier question right now. It’d help us boost productivity a lot.
Those would be two examples of issues I think about.
COWEN: I think most people are actually pretty good at knowing their weaknesses. They’re often not very good at knowing their talents and strengths. And I include highly successful people. You ask them to account for their success, and they’ll resort to a bunch of cliches, which are probably true, but not really getting at exactly what they are good at.
If I ask you, “Robert Wiblin, what exactly are you good at?” I suspect your answer isn’t good enough. So just figuring that out and investing more in friends, support network, peers who can help you realize that vision, people still don’t do enough of that.
COWEN: But you might be more robust. So the old story is two polarities of power versus many, and then the two looks pretty stable, right? Deterrents. USA, USSR.
But if it’s three compared to a world with many centers of power, I don’t know that three is very stable. Didn’t Sartre say, “Three people is hell”? Or seven — is seven a stable number? We don’t know very much. So it could just be once you get out of two-party stability, you want a certain flattening.
And maybe some parts of the world will have conflicts that are undesirable. But nonetheless, by having the major powers keep their distance, that’s better, maybe.
In 2004, Jeff Sachs and co-authors revived an old theory to explain Africa’s failure to develop, the poverty trap, and an old solution, the big push.
Our explanation is that tropical Africa, even the well-governed parts, is stuck in a poverty trap, too poor to achieve robust, high levels of economic growth and, in many places, simply too poor to grow at all. More policy or governance reform, by itself, will not be sufficient to over-come this trap. Specifically, Africa’s extreme poverty leads to low national saving rates, which in turn lead to low or negative economic growth rates. Low domestic saving is not offset by large inflows of private foreign capital, for example foreign direct investment, because Africa’s poor infrastructure and weak human capital discourage such inflows. With very low domestic saving and low rates of market-based foreign capital inflows, there is little in Africa’s current dynamics that promotes an escape from poverty. Something new is needed.
We argue that what is needed is a “big push” in public investments to produce a rapid “step” increase in Africa’s underlying productivity, both rural and urban.
As the title of the blog might suggest, I was skeptical. But even if a big push wasn’t exactly the right idea, I’m all in favor of Big Ideas and Sachs pursued his Big Idea with tremendous skill and media savvy. Pilot programs were soon up and running and then quickly expanded into full programs. In June 2010, the Millennium Villages Project released its first public evaluation and that is when things started to fall apart.
The initial MVP evaluation claimed great success but simply compared some development indicators before and after in the treated villages without comparing to trends elsewhere. In 2010 such a study was completely out of step with contemporary practices in impact evaluation. Red flag! Clemens and Demombynes showed that comparing to trends elsewhere significantly moderated the impact. A second MVP paper was published in the Lancet but then was quickly retracted when Bump, Clemens, Demombynes and Haddad demonstrated that it had significant errors. Clemens and Demombynes wrote a summary piece on the controversy then in an astounding and under-reported scandal the MVP tried to stifle Clemens and Demombynes. The MVP, with Jeff Sachs at the head, also sicced their lawyers on Nina Munk and her book, The Idealist: Jeffrey Sachs and the Quest to End Poverty. More red flags.
Yet, despite all of this controversy and bad behavior, the MVP project continued to move ahead and in 2012, the UK Department for International Development (DFID) funded US $11 million into an MVP in Northern Ghana that ran until December 2016. Under the auspices of the DFID, we now finally have the first in-depth, independent evaluation of one MVP project and it doesn’t look great. The project did some good but the big push failed and the good that was done could have been done at lower cost.
Overall, the MVP in northern Ghana did not achieve the overall MDG target to reduce extreme poverty and hunger at the local level. Where there are attributable changes to the MDG targets, these tended to be the more limited changes than those that will fundamentally improve people’s health, educational and other outcomes. For instance, the project did increase attendance at primary school (Goal 2) but did not go beyond this MDG and improve the learning outcomes of children; the project did increase the proportion of births attended by professionals and women said to be using contraceptive methods (MDG indicators), but it is not possible to assess the effect on maternal health (Goal 5); and the project did increase the number of toilets (a target under Goal 7), but not beyond this MDG in terms of hygiene and sanitation practices. There are, however, exceptions. The project had a remarkable impact on stunting, which is a long-term health indicator and a predictor of socioeconomic outcomes in adulthood.
So the MVP had some good effects on some indicators:
But is this impact sufficient given the size of the investment? And, by doing everything together, is there a synergistic effect that offers greater value for money than would arise through implementing individual sector-based interventions? In our cost-effectiveness analysis, we demonstrate that the project has so far not yielded sufficiently positive results, and what has been achieved could have been attained at a substantially lower cost (even when we take account of investments made for future usage). As such, the project seems to have fallen short of producing a synergistic effect; and the impact is not large enough for the project to be regarded as cost-effective, even when each sector is assessed independently of the others. Of course, in the longer run, the MVP may produce welfare gains. Importantly the investments in improving the health care service may enhance health outcomes later on; or other considerable investments in infrastructure (roads, health and school facilities) may have an impact on future outcomes.
Perhaps then, the most concerning findings are the early indications that the MVP approach will be difficult to be sustained by district institutions and at the community level; and there are signs that any gains made under the project are already being undermined.
Addendum: Andrew Gelman and co-authors, including Jeff Sachs, offer a broadly similar although less negative in tone evaluation of the entire MVP project.