Those who grew up in East Germany seem to have a harder time cottoning to the realities of capitalism:
We analyze the long-term effects of living under communism and its anticapitalist doctrine on households’ financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to positive “emotional tagging,” e.g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns.
That is from a new NBER paper by Christine Laudenbach, Ulrike Malmendier, and Alexandra Niessen-Ruenzi.
But if you are looking for a contrary point of view, consider this new paper by Sascha O. Becker, Lukas Mergele, and Ludger Woessmann:
German separation in 1949 into a communist East and a capitalist West and their reunification in 1990 are commonly described as a natural experiment to study the enduring effects of communism. We show in three steps that the populations in East and West Germany were far from being randomly selected treatment and control groups. First, the later border is already visible in many socio-economic characteristics in pre-World War II data. Second, World War II and the subsequent occupying forces affected East and West differently. Third, a selective fifth of the population fled from East to West Germany before the building of the Wall in 1961. In light of our findings, we propose a more cautious interpretation of the extensive literature on the enduring effects of communist systems on economic outcomes, political preferences, cultural traits, and gender roles
That said, I still believe that communism really matters, and durably so, even if the longer history matters all the more so. And now there is yet another paper on East Germany and political path dependence, by Luis R. Martinez, Jonas Jessen, and Guo Xu:
This paper studies costly political resistance in a non-democracy. When Nazi Germany surrendered in May 1945, 40% of the designated Soviet occupation zone was initially captured by the western Allied Expeditionary Force. This occupation was short-lived: Soviet forces took over after less than two months and installed an authoritarian regime in what became the German Democratic Republic (GDR). We exploit the idiosyncratic line of contact separating Allied and Soviet troops within the GDR to show that areas brieﬂy under Allied occupation had higher incidence of protests during the only major episode of political unrest in the GDR before its demise in 1989 – the East German Uprising of 1953. These areas also exhibited lower regime support during the last free elections in 1946. We argue that even a “glimpse of freedom” can foster civilian opposition to dictatorship.
I take the core overall lesson to be that the eastern parts of Germany will experience significant problems for some time to come.
And speaking of communist persistence, why is it again that Eastern Europe is doing so well against Covid-19? Belarus is an extreme case, with hardly any restrictions on activity, and about 14,000 cases and 89 deaths. You might think that is a cover-up, but the region as a whole has been quite robust and thus it is unlikely to be a complete illusion. And no, it doesn’t seem to be a BCG effect.
Does communism mean there is less of a culture of consumption and thus people find it easier to just stay at home voluntarily? Or have all those weird, old paranoid communist pandemic ministries persisted and helped with the planning? Or what?
Double credit on this one to both Kevin Lewis and Samir Varma, neither less excellent in his conjunction with the other.
Very well-deserved, here is the full account, including a summary of her research. Excerpt:
Historians (e.g., Engerman and Sokolov) have long argued for the persistence of institutions and the “long shadow” of historical events on developing countries. For example, cross-national studies have noted that Latin America and North America organized labor differently during colonial periods and used cross-country historical data to support the idea that these differences have had long-run impacts. More generally, Acemoglu, Johnson, and Robinson compare the experience of countries with different institutions set in place during colonial time for largely accidental reasons, showing that these early differences continue to matter today.
In her work, Dell goes beyond the cross-country evidence, using historical accidents or peculiarities to shed light on persistent effects of institutional differences, including different in the organization of the state. She exploits historical settings in which she is able to very convincingly establish the persistent impacts of specific institutions as well as explore specific channels through which these impacts occur.
Do read the whole thing. Here are some previous MR posts on Melissa Dell.
The latest relief bill contains another $320 billion in small business relief and $25 billion for testing. Finally, we get some serious money to actually fight the virus. But as Paul Romer pointed out on twitter, this is less than half of what we spend on soft drinks!!! (Spending on soft drinks is about $65 billion annually). Soda is nice but it is not going to save lives and restart the economy. Despite monumental efforts by BARDA and CEPI we are also not investing enough in capacity for vaccine production so that if and when when a vaccine is available we can roll it out quickly to everyone (an issue I am working on).
The failure to spend on actually fighting the virus with science is mind boggling. It’s a stunning example of our inability to build. By the way, note that this failure has nothing to do with Ezra Klein’s explanation of our failure to build, the filibuster. Are we more politically divided about PCR tests than we are about unemployment insurance? I don’t think so yet we spend on the latter but not the former. The rot is deeper. A failure of imagination and boldness which is an embarrassment to the country that put a man on the moon.
In Launching the Innovation Renaissance I said the US was a welfare/warfare state and no longer an innovation state. The share of R&D in the Federal Budget, for example, has diminished from about 12% at its height in the NASA years to an all time low of about 3% in recent years. We are great at spending on welfare and warfare but all that spending has crowded out spending on innovation and now that is killing us.
Here is the audio and transcript, here is part of the summary:
He joined Tyler to discuss whether the world as a whole is becoming harder to predict, whether Goldman Sachs traders can beat forecasters, what inferences we can draw from analyzing the speech of politicians, the importance of interdisciplinary teams, the qualities he looks for in leaders, the reasons he’s skeptical machine learning will outcompete his research team, the year he thinks the ascent of the West became inevitable, how research on counterfactuals can be applied to modern debates, why people with second cultures tend to make better forecasters, how to become more fox-like, and more.
Here is one excerpt:
COWEN: If you could take just a bit of time away from your research and play in your own tournaments, are you as good as your own best superforecasters?
TETLOCK: I don’t think so. I don’t think I have the patience or the temperament for doing it. I did give it a try in the second year of the first set of forecasting tournaments back in 2012, and I monitored the aggregates. We had an aggregation algorithm that was performing very well at the time, and it was outperforming 99.8 percent of the forecasters from whom the composite was derived.
If I simply had predicted what the composite said at each point in time in that tournament, I would have been a super superforecaster. I would have been better than 99.8 percent of the superforecasters. So, even though I knew that it was unlikely that I could outperform the composite, I did research some questions where I thought the composite was excessively aggressive, and I tried to second guess it.
The net result of my efforts — instead of finishing in the top 0.02 percent or whatever, I think I finished in the middle of the superforecaster pack. That doesn’t mean I’m a superforecaster. It just means that when I tried to make a forecast better than the composite, I degraded the accuracy significantly.
COWEN: But what do you think is the kind of patience you’re lacking? Because if I look at your career, you’ve been working on these databases on this topic for what? Over 30 years. That’s incredible patience, right? More patience than most of your superforecasters have shown. Is there some dis-aggregated notion of patience where they have it and you don’t?
TETLOCK: [laughs] Yeah, they have a skill set. In the most recent tournaments, we’ve been working on with them, this becomes even more evident — their willingness to delve into the details of really pretty obscure problems for very minimal compensation is quite extraordinary. They are intrinsically cognitively motivated in a way that is quite remarkable. How am I different from that?
I guess I have a little bit of attention deficit disorder, and my attention tends to roam. I’ve not just worked on forecasting tournaments. I’ve been fairly persistent in pursuing this topic since the mid 1980s. Even before Gorbachev became general party secretary, I was doing a little bit of this. But I’ve been doing a lot of other things as well on the side. My attention tends to roam. I’m interested in taboo tradeoffs. I’m interested in accountability. There’re various things I’ve studied that don’t quite fall in this rubric.
COWEN: Doesn’t that make you more of a fox though? You know something about many different areas. I could ask you about antebellum American discourse before the Civil War, and you would know who had the smart arguments and who didn’t. Right?
…I had a very interesting correspondence with William Safire in the 1980s about forecasting tournaments. We could talk a little about it later. The upshot of this is that young people who are upwardly mobile see forecasting tournaments as an opportunity to rise. Old people like me and aging baby-boomer types who occupy relatively high status inside organizations see forecasting tournaments as a way to lose.
If I’m a senior analyst inside an intelligence agency, and say I’m on the National Intelligence Council, and I’m an expert on China and the go-to guy for the president on China, and some upstart R&D operation called IARPA says, “Hey, we’re going to run these forecasting tournaments in which we assess how well the analytic community can put probabilities on what Xi Jinping is going to do next.”
And I’ll be on a level playing field, competing against 25-year-olds, and I’m a 65-year-old, how am I likely to react to this proposal, to this new method of doing business? It doesn’t take a lot of empathy or bureaucratic imagination to suppose I’m going to try to nix this thing.
COWEN: Which nation’s government in the world do you think listens to you the most? You may not know, right?
I will be doing a Conversation with him, no associated public event. He has been tweeting about the risks of a financial crisis during Covid-19, but more generally he is one of the most influential historians, currently being a Professor at Columbia University. His previous books cover German economic history, German statistical history, the financial crisis of 2008, and most generally early to mid-20th century European history. Here is his home page, here is his bio, here is his Wikipedia page.
So what should I ask him?
For the 1970 and subsequent censuses, the Postal Service took on an even greater role. Most households received a machine-readable survey by mail and returned it the same way. This cut out two labor- intensive processes: canvassing most households and transcribing data by hand. Censuses since 1970 have generally followed the same process. The biggest change was that the 2010 survey dropped the “long-form” census – a major labor-saving change that nevertheless did not have an obvious impact on the amount of labor expended.
Despite the introduction of labor-saving technologies, the Census hires more people relative to the population than it did in earlier periods. In 1950, 46 million households – the entire country – were canvassed by 170,000 field staff. In 2000, 45 million addressees failed to mail back the survey, and the Census Bureau hired 539,000 field staff to take on the task of nonresponse follow-up. What seems like basically the same task took three times as many employees.
That is from Salim Furth, there is much more at the link, including footnotes for the above excerpt. Of course this year the labor investment is likely to be much, much lower.
One of the best books on the history of American higher education, author Miguel Urquiola of Columbia argues for the importance of market competition in the rise and dominance of the American system. Strongly argued and full of good evidence and stories, here is one excerpt I found of interest:
That Columbia would be among the first successful American research universities would have surprised many observers around 1850, as the school had seen real oscillations in its fortunes. For the first decades after its creation in 1754, Columbia was a wealthy but small school. In 1774 it had the highest collegiate endowment, but only 36 students, while Harvard and Yale had four or five times as many…in 1797 the college had eight faculty members, during most of the 1800s it had four. In 1809, an inquiry warned that Columbia College “was fast becoming, if it has not become already, a mere Grammar School”; between 1800 and 1850, even as New York City grew, the school’s enrollment stagnated, and even in 1850 the average entering age was 15.
Among wealthy countries, the United States is unusual in letting its university sector operate as a free market. Self-rule, free entry, and free scope are much less prevalent in Europe.
Recommended, you can pre-order here.
That is a recent book by Ahmet T. Kuru, published in August. All books should have a (non-Amazon) abstract, and here it is for this book:
Why do Muslim-majority countries exhibit high levels of authoritarianism and low levels of socioeconomic development in comparison to world averages? Ahmet T. Kuru criticizes explanations which point to Islam as the cause of this disparity, because Muslims were philosophically and socioeconomically more developed than Western Europeans between the ninth and twelfth centuries. Nor was Western colonialism the cause: Muslims had already suffered political and socioeconomic problems when colonization began. Kuru argues that Muslims had influential thinkers and merchants in their early history, when religious orthodoxy and military rule were prevalent in Europe. However, in the eleventh century, an alliance between orthodox Islamic scholars (the ulema) and military states began to emerge. This alliance gradually hindered intellectual and economic creativity by marginalizing intellectual and bourgeois classes in the Muslim world. This important study links its historical explanation to contemporary politics by showing that, to this day, the ulema–state alliance still prevents creativity and competition in Muslim countries.
I don’t really have my own view on these issues, and due to various duties and also the slowness of my on-line reading, I have read only a segment of this book. I can report it is clearly written, to the point, and well argued, and I am happy to recommend it to anyone interested in these issues.
I think I will use MR today to catch up on some “book news,” after that back again to coronavirus for a while.
The inhabitant of New York could order by computer, sipping his morning coffee in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate with passport or other formality and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing just a credit card upon his person, and would consider himself greatly aggrieved by the TSA but otherwise much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, exclusion and of pandemics which were to play the serpent to this paradise, were little more than the amusements of his daily twitter feed, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.
Only slightly modified.
In autumn 1830, Pushkin was confined by a cholera outbreak to the village of Boldino, his father’s remote country estate in southeastern Russia. Desperate to return to Moscow to marry, he wrote to his fiancée: “There are five quarantine zones between here and Moscow, and I would have to spend fourteen days in each. Do the maths and imagine what a foul mood I am in.”
Pushkin went on complaining bitterly but, with nothing else to do, he produced an astonishing number of masterpieces — short stories, short plays, lyric and narrative poems, and the last two chapters of his verse novel Eugene Onegin — in a mere three months.
Here is the full FT piece by Robert Chandler.
This is from a very able and perceptive correspondent:
|World 1.0||World 2.0|
|110 successive months of job growth||10 million jobless claims in 2 weeks|
|10 year bull market across sectors||Winners and losers with extreme outcome inequality|
|Full employment||30% unemployment|
|Base rate thinking||First principles thinking|
|Office by default||Remote by default|
|Office for work||Office for connection, community, ecosystem, makerspaces|
|Suit, tie, wristwatch, business card||Good lighting, microphone, webcam, home office background|
|Commute + traffic jams||Home + family|
|Last mile||Only mile|
|Restaurants||Groceries + delivery|
|$4 toast||Sourdough starter|
|$100k for college||Not paying $100k for a webinar|
|Internal issues||Exogenous shock|
|Lots of little problems||One big problem|
|Stupid bullshit||Actual issues|
|Too much technology||Too little technology|
|Assume some government competence||Assume zero government competence|
|Trusted institutions||Trusted people|
|Tail risk is kooky||Tail risk is mainstream|
|Boomers most powerful||Boomers most vulnerable|
|Productivity growth collapse||Economic collapse|
|Social services Democrat||UBI Communist|
|Corporate debt||Government debt|
|Techlash||Tech a pillar of civilization and lifeline to billions|
|Break up Amazon||Don’t break up Amazon!!!|
|Avoiding social issues||Avoiding layoffs|
|Phone is a cigarette||Phone is oxygen|
|Resource depletion||$20 oil, $0.75 watt solar, <$100/kwh batteries|
|Low volatility||High volatility|
|20th century||21st century|
WWII is viewed as the quintessential example of fiscal stimulus and exerts an outsized influence on fiscal multiplier estimates, but the wartime economy was highly unusual. I use newly-digitized contract data to construct a state-level panel on U.S. spending in WWII. I estimate a relative fiscal multiplier of 0.25, implying an aggregate multiplier of roughly 0.3. Conversion from civilian manufacturing to war production reduced the initial shock to economic activity because war production directly displaced civilian manufacturing. Saving and taxes account for 75% of the income generated by war spending, implying that the add-on effects from increased consumption were minimal.
That is from a 2018 paper by Gillian Brunet, and you will note that it reflects the consensus of the literature as a whole. I do favor the federal government borrowing and spending a great deal of money right now on things that we need. If you think we are in a traditional Keynesian scenario, or are pulling out a traditional AS-AD model, you are going to be very badly disappointed. Most of all, we need to be spending more on public health and remedies for Covid-19. Here is my earlier Bloomberg column on analogies and disanalogies between Covid-19 and World War II. And again, see Garett Jones and Dan Rothschild on the 2009 stimulus.
By Hui Tong and Shang-Jin Wei, newly relevant!
This paper investigates whether and how unconventional interventions in 2008–2010 unfroze the credit market. We construct a dataset of 198 interventions for 16 countries during 2008–2010 and examine heterogeneous responses in stock prices to the interventions across 7,873 nonfinancial firms in those countries. Stock prices increase when the interventions are announced, particularly for firms with greater intrinsic need for external capital. This pattern is corroborated by subsequent expansions in firm investment, R&D expenditure, and employment. Among various forms of interventions, recapitalization of banks appears particularly effective in channeling the intervention effects from financial to nonfinancial sectors.
That is a new paper by Sergio Correia, Stephan Luck, and Emil Verner, I have not read it, here is the abstract:
What are the economic consequences of an influenza pandemic? And given the pandemic, what are the economic costs and benefits of non-pharmaceutical interventions (NPI)? Using geographic variation in mortality during the 1918 Flu Pandemic in the U.S., we find that more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. The downturn is driven by both supply and demand-side channels. Further, building on findings from the epidemiology literature establishing that NPIs decrease influenza mortality, we use variation in the timing and intensity of NPIs across U.S. cities to study their economic effects. We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.
Via Jason Furman.
How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. Using more sparse data, we find real wages somewhat elevated following pandemics. The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater
That is a new paper by Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor. And here is the tweet storm. It should be noted, of course, that the Spanish flu did not give rise to a comparable economic stagnation.
Via Evan Soltas.