Growth and the real exchange rate

by  Tyler Cowen in

Dani Rodrik, who is back at blogging, also has a new paper.  Here is the abstract:

I provide evidence that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. There is also some evidence that the operative channel is the size of the tradable sector (especially industry). These Â…findings suggest that tradable goods suffer disproportionately from the government or market failures that keep poor countries from converging towards higher-income levels. I present two categories of explanations as to why this may be so, focusing on (a) institutional weaknesses, and (b) product-market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.

No, mercantilism has not made a comeback.  Public choice economics has.  The most plausible mechanism is that most poor countries have dysfunctional interest groups.  Exporters are a relatively growth-enhancing set of interest groups.  So if your policies favor exporters, the quality of your interest groups will increase over time.  Your policy will stay good or get better and your growth will go up.  In other words, what Toyota wants is pretty good for Japan.  China’s hope is that its new businessmen want to keep some modicum of freedom, and so on.

Of course low real exchange rates trickle away over time, as domestic prices rise and markets restore the real exchange rate of their choice.  But low real exchange rates are probably a good proxy for other export-friendly policies, such as predictable regulation and investment in infrastructure.  And so low real exchange rates are only doing part of the work in driving growth and probably not even the biggest part.  If we had an index of "export friendliness" for the countries in this sample, maybe the power of the low real exchange rate would go away.  This explains why wealthier countries, who don’t have dysfunctional interest groups to the same degree, also don’t see comparable growth benefits from low real exchange rates.  Rodrik even points out on pp.14-15 that the countries with the worst governance indices see the biggest growth gain from low real exchange rates.  (By the way, in the public choice story the improvements in the quality of your interest groups and in your policy don’t come until later and thus they are not captured in the current level of the quality of governance index.)

Brad DeLong comments here and here and here.

Can you trust a man who doesn’t trust his wife?

by  Tyler Cowen in

I owe that line to Robin Hanson.  Here is the latest:

Six weeks after Bruce E. Ivins
killed himself, the cremated remains of Mr. Ivins, the Army scientist
and anthrax suspect, are stored at a funeral home here, awaiting the
outcome of an unusual probate court proceeding.

…Dr. Ivins wrote of his wish to be cremated and have his ashes
scattered. But fearing that his wife, Diane, and their two children
might not honor the request, he came up with a novel way to enforce his
demand: threatening to make a bequest to an organization he knew his
wife opposed, Planned Parenthood.

“If
my remains are not cremated and my ashes are not scattered or spread on
the ground, I give to Planned Parenthood of Maryland” $50,000, Dr.
Ivins wrote in the will. Court records value the estate at $143,000.

Ms. Ivins is a former president of Frederick County Right to Life, according to F.B.I. records.

The NYT article concludes (do they ever write contingent contracts?):

The will adds another stroke to the portrait that has emerged from
F.B.I. records of Dr. Ivins, an anthrax specialist at the Army’s
biodefense laboratory at Fort Detrick, in Maryland, as quirky and
mentally troubled.

His wife, at least, says he is innocent.  What would you think of a man who wrote such a contract? 

The bottom line

by  Tyler Cowen in

…off the top of my head, I cannot come up with any reason to
subsidize mortgage indebtedness. How does your having a mortgage loan
benefit me? Does anyone have an answer for that? Bueller?

I think that mortgage subsidies emerged pretty much by accident. The
income tax deductibility began when hardly anyone paid income tax, and
it has been grandfathered in ever since. In the 1930’s, government
decided to reshape the mortgage market, and that effort evolved into
government agencies, such as Fannie Mae, FHA, and Freddie Mac. Fannie
and Freddie were subsequently spun out to private shareholders as
government-sponsored enterprises, but Congress never let the GSE’s
forget that they had a "mission" to provide subsidies to low-income
borrowers.

That’s Arnold Kling.  I’ll add two complementary points.  First, higher investment in homes may bring negative externalities through climate change.  Second, home ownership apparently makes a laborer less geographically mobile and increases the severity of business cycles and real shocks.

Will the informal sector drive third world growth?

by  Tyler Cowen in

No:

The overall picture of economic development that emerges from this analysis is in some ways very similar to the traditional pre†growth†theory development economics, although it is related to the modern reformulations of economic growth through the lens of development economics (Banerjee and Dulfo 2005). The recipe for productivity growth is the formation of official firms, the larger and the more productive, the better. Such formation must perhaps be promoted through tax, human capital, infrastructure, and capital markets policies, very much along the lines of traditional dual economy theories. From the perspective of economic growth, we should not expect much from the unofficial economy, and its millions of entrepreneurs, except to hope that it disappears over time. This “Walmart” theory of economic development receives quite a bit of support from firm level data.

That’s from a recent La Porta and Shleifer paper, just presented at Brookings.  I find this very convincing.  The pointer comes from Greg Mankiw.

Sentence of the Day

by  Alex Tabarrok in

It is through exchange that difference becomes a blessing, not a curse.

Chief Rabbi of Great Britain, Jonathan Sacks quoted in McCloskey’s The Bourgeois Virtues.

Hat tip to Steve Horowitz at The Austrian Economists who rightly says "Have the benefits of specialization and exchange ever been presented more concisely and beautifully than in that one sentence?"  Maybe this should be sentence of the year.

Intelligent Design and Evolution

by  Alex Tabarrok in

A few years ago I wrote (follow up here):

Suppose that you find a watch in the forest.  If you know there is
no watchmaker then the theory of evolution is a brilliant and
compelling explanation for the presence of complexity without design.
But suppose that you know a watchmaker exists then surely the simplest
and most compelling explanation is that the watchmaker made the watch.
Any other explanation, particularly one so improbable
as evolution would seem to be preposterous and beside the point.

Thus for someone who knows, really knows, that
god(s) exists (and there are many people who claim to know that god(s)
exists) then some form of creationism follows as a
rational deduction from the premises.  It’s no point telling these
people that creationism is unscientific because given the premise that god(s) exists creationism is scientific.
If god(s) exists then evolution is almost certainly false, if not in
every particular then surely in the grand claims of a undesigned
nature.

Not surprisingly the argument created a firestorm of opposition (see the many nasty comments on the two original posts).  Thus, I am quite pleased to see that renowned philosopher Thomas Nagel writing in Philosophy and Public Affairs has recently made the same argument.  Nagel writes:

What [Intelligent Design] does depend on is the assumption that the hypothesis of a designer makes sense and cannot be ruled out as impossible or assigned a vanishingly small probability in advance. Once it is assigned a significant prior probability, it becomes a serious candidate for support by empirical evidence, in particular empirical evidence against the sufficiency of standard evolutionary theory to account for the observational data…

…Judge Jones cited as a decisive reason for denying ID the status of science that Michael Behe, the chief scientific witness for the defense, acknowledged that the theory would be more plausible to someone who believed in God than to someone who did not. This is just common sense, however, and the opposite is just as true: evolutionary theory as a complete explanation of the development of life is more plausible to someone who does not believe in God than to someone who does.

Nagel has much more of interest to say about teaching science given that ID is scientific if one accepts belief in god. 

Hat tip to Robin Hanson’s post, Intelligent Design Honesty, at Overcoming Bias.

The economics of the two Koreas

by  Tyler Cowen in

The official told FOX News there are no signs of
instability in North Korea now, but the likelihood of a smooth
transition of power in that country is not high.

Here is the story, fully speculative throughout.  Many people think Kim is in very bad shape.  Apparently the U.S. and China are drawing up contingency plans for what comes next, financed in part by those interest payments on the agency debt.

One topic at today’s lunch was to guess the chance that the North Korean communist regime might collapse forever in the next few years.  I said p = 0.3, which others found to be a high estimate.  A second topic was, if reunification of the Koreas occurred (itself an open question), how long it would take for the South to grow again, given the amount of reconstruction it would have to finance in the North.  I said twenty years, though upon reflection I’ll revise that downwards a bit.

It’s hard to say much about these topics with any grounding, but since no one else in the econ blogosphere is talking about them, I will.  It’s by far the most important drama going on in the world right now.

Katha Pollit has some questions for Sarah Palin

by  Tyler Cowen in

I know this is serious stuff and it shouldn’t cause me to snort.  But it does.  I loved this dual question:

What is the European Union, and how does it function?

Not quite as good is:

What is the function of the Federal Reserve?

The link is from Ezra Klein.  Bear Stearns, Ireland, Georgia, and Denmark are invited to submit their answers as well.  How about Lehman Brothers and Turkey?

Addendum: On this list, questions #2, 4, 6 and 17 bear some pondering too.  Nor is #3 as simple as many people think.

Sentences to ponder

by  Tyler Cowen in

Recent research by economists Amy Finkelstein, Erzo Luttmer, and Matthew Notowidigdo suggests that you’ll get a bigger bang for your consumer buck by spending while you’re healthy, before old age starts to take the fun out of life’s indulgences.

Here is more.  I worry about the asymmetry between gaining happiness and avoiding pain.  Surely money for the young is better for the former but how about the latter?

Customer relations

by  Tyler Cowen in

Treasury tried to head off such concerns by having David McCormick, the
undersecretary for international affairs, call foreign central banks and other
overseas buyers of the companies’ securities or debt to reassure them of the
instruments’ creditworthiness. Over the weekend, Treasury officials called
sovereign-wealth funds in Abu Dhabi and elsewhere in the Middle East, assuring
them that they were working on financial issues involving Fannie and Freddie,
says an individual apprised of the conversations.

Here is much more, interesting throughout.  Read this too.  But no, the buyers forced the hand of our government by essentially threatening, through inaction, to induce a massive run on the uninsured U.S. financial institutions.  One response is to insure all of those institutions, as the dominoes continue to fall.  Another response is to believe that runs on unprotected financial institutions are not very dangerous.  The third, correct response is…?

What are our personal obligations toward the environment?

by  Tyler Cowen in

From the hum of the city, while pondering fossil fuel consumption, Megan McArdle writes:

I understand that people’s desires for large houses in leafy suburbs
are every bit as valid as my ardent desire to live near the peaceful
hum of traffic.  Unfortunately, there is no such thing as a policy that
effects everyone equally, and the painful job of being an adult is
doing things we don’t like because they’re the morally right thing to
do.

From my mid-sized house in a leafy suburb, I will assume that a) environmental concerns are real, b) we will fall short of fixing those problems through public policy (Megan uses the word policy but mostly her post is about personal obligation), and c) we do in fact have personal obligations to limit consumption.  The question remains how much fun we can have.  Fossil fuel consumption isn’t necessarily the area of optimal sacrifice.  For instance here are two other options:

1. Send money and other forms of aid to the victims and future victims.

2. Have fewer children than otherwise, if only in the stochastic sense (e.g., don’t move to Alaska at a young age).  Climate change is not the last environmental burden we will place on the world and probably not even the biggest such burden, but fewer people does mean less human pressure along many environmental dimensions, present and future.

Assuming that restriction is indeed called for, either of those might be more personally imperative than:

3. Fly and drive less and buy a smaller house.

Most people focus on #3 because lower energy consumption makes them feel less affiliated with the particular problem at hand.  But instrumentally speaking at a low discount rate #2 is more potent and at any discount rate #1 can be a more effective form of aid to the victims.

In this setting, I can see a few theories of our duties:

a. Do that which yields the highest net social return if only you do it.

b. Do that which yields the highest net social return if many people were to do it.

c. Cut back on your activities which most closely resemble aggressive interference into the lives of others.

d. Perform the action most likely to influence the behavior of others.

Belief in "a" favors sending money.  Belief in "b" favors having fewer children.  Belief in "c" favors restricting your driving and flying.  I am not sure which course of action follows from belief in "d."

You might think that you should do some mix of 1, 2, and 3,  But if your MU schedules are sufficiently flat, an argument from Steven Landsburg implies it is optimal to concentrate your sacrifice in a single "best returns" project.  So it may suffice to pick either 1, 2, or 3 and do it very well.

The bottom line: Perhaps I should call this blog post An Apology for Me.