The debt ceiling circus is another media debacle

If you compare the media coverage about the current debt ceiling "discussions" in the US to abroad, it is a stark contrast of style. While the US media is focused on the power haggling of politicians, ignoring completely policy matters, foreign media puzzle why such a silly policy the Republicans are proposing is even being discussed. And once more, it makes me wonder why the US media is sleeping.

Roughly, the Republicans want to erase the public deficit from one day to the next, in the middle of difficult times, and without raising taxes, cutting anything to defense expenses and farm subsidies or closing corporate tax loopholes. This is mathematically simply impossible and must results in partial default on public debt, a major increase in interest rates and in then more public expenses to service the debt. In other words, this is an own goal. To top it, the policy uncertainty is severely hurting the US economy which does not seem to be able to get back on track.

The saddest aspect of this is that the media is completely oblivious to this. It is so obsessed to present both views that it shows without critical discussions complete absurdities from the Republicans. I have a hard time understanding the motivations of the right, except hurting the economy ahead of elections or participating in some grand scale insider trading, and nobody in the media is pointing this out. In fact it is relaying the arguments that decreasing taxes will increase revenue, especially if the rich get those breaks. To repeat myself, this is so wrong, especially now. If you want to improve the economy and insist on reducing the deficit, give tax breaks or transfers to the poor and tax the rich significantly more.

The worst is that there are some serious negative externalities on many who have absolutely no say here, and not just the US tax payers, but also foreign economies. Rarely have I seen such a policy kamikaze, say since Saddam Hussein invaded Kuwait. But at least the US media was then on top things.

Referee home bias

Referees are supposed to be impartial. In academics, this is most of the time helped by the fact that they are anonymous. In sports, referees are public and meeting participants, including spectators, try to influence them. This becomes particularly relevant when the referee has to take a decision against the home team than leaves spectators irate. They could retaliate against him. Does this influence referees?


Andrés Picazo-Tadeo, Francisco Gónzalez-Gómez and Jorge Guardiola Wanden-Berghe look at first division football in Spain, carefully taking into account stadium capacity, how full it is, how far spectators are from the pitch, and referee experience. They find that awarding a free kick does not have a home bias, which is consistent with the fact that this is a split-second decision. The ensuing decision to give the offending player a caution is, however, affected by home bias. This decision is not instantaneous, and social pressure can be exerted on the referee, especially when the stadium is full. The presence of a running track that separates the local supporters form the action does not seem to matter, though. I wonder whether some teams have a larger home bias than others, as the fans' reputation could also influence referees.

Do unemployed and employed compete for the same jobs?

In times like now, it is easy to forget that job seekers are not only the unemployed, but also the currently employed. On-the-job search is rather common but difficult to measure, as it is often not openly conducted. But it is important to understand it for policy, for example to evaluate the impact of job creation programs.

Simonetta Longhi and Mark Taylor just finished a couple of papers that offer some insights about these two types of job seekers in the United Kingdom. In the first one, they compare their characteristics and search behavior and conclude that employed and unemployed job seekers are different. My reading is that the unemployed are often stuck in a sequence of low paying jobs and drift in and out of employment. The employed job seekers are rather on the way up and improve their situation at each change. Thus these two types are not substitutes and do not compete for the same jobs.


In the second paper, they compared the job finding probability of both types. Consistently for search theory, they observe that on-the-job seekers take much longer to find jobs, reflecting that they can afford to wait for the perfect match. The unemployed, however, have content themselves with the first offer, especially since unemployment insurance criteria have tightened in the UK. The presence of the former has no impact on the search success of the latter, confirming that they are not substitutes.

Kuznets in a post-industrial world

The Kuznets curve traces the evolution of inequality as an economy develops. It is based on Kuznets observation that income and wealth inequality increased and then subsided as economies get richer. While this was established on a cross-section of countries, it has been proven right in the time dimension in some cases, like England and Wales through the Industrial Revolution. But what happens thereafter, when an economy further develops into one where the service sector dominates or globalization becomes most relevant?

Jordi Guilera asks this question noting that most developed economies have recently experienced a sharp increase in inequality. Is thus Kuznets' inverted-U becoming a N? Beyond simply observing this, one would also need a theory with predictions about other correlations to make some progress. The theory here is that skill-biased technological change generates increasingly large education premia, and evidence from long-term wage inequality in Portugal seems to corroborate this hypothesis. In particular it shows that inequality between sectors was the leading determinant of inequality until the 1980s, while inequality within sectors has taken over now.

Trade constraints of developing countries

With all the current posturing in the US and Europe, while addressing doubtlessly important problems, it is easy to forget that there are much bigger issues that need to be solved: how to get the poor and especially the poorest economies to a decent standard of living. We have been blessed to be born in the right families and in the right countries, and we should share this luck with those who were no so fortunate. This does not necessarily mean to give to the poor, just giving them a fair chance may be enough.

Jean-Jacques Hallaert, Ricardo Cavazos Cepeda and Gimin Kang consider the consequences of trade barriers on developing economies. The latter should be able to benefit greatly from selling on world markets goods produced with the factor they are relatively rich of, unskilled labor and to some extend land, while importing the complementary goods, likely capital-intensive investment goods. This OECD study finds that developed economies cannot do much more in terms of reducing import tariffs. Where there is more potential is with home-grown issues: unreliability of electricity, high transportation costs, poor education, bad governance, and instability. These results have been obtained by regressing exports, imports or their sum on a number of indicator for a panel of data. I am not particularly keen on these exercises due to poor data quality, gigantic endogeneity and especially the fact that proxies for essentially unquantifiable variables are used, like property rights and governance. But I suppose this is the best one can do, and the results appear to be rather stark. Now as to how to solve these economic problems, that is a gigantic task that we should be really talking about these days, instead of posturing for political gain.

How not to think about class struggles

Depending on the research question being asked, some degree of heterogeneity is required in a model. Sometimes this modeling requires distinguishing between those who provide capital and those who work. This is obviously an abstraction, because in reality these "capitalists" may just be shareholders who also work on the labor market. In fact, they often are, and they save and invest for various purposes, like self-insurance, retirement or bequests. But making households purely capitalists and workers can sometimes prove useful in making a result emerge more clearly, as long as one is conscious of the abstraction. In some circumstances, it is useful to explain why these "classes" emerge, like differences in access to credit or in subjective discount rates. But again, these are abstractions useful for modeling.

Alberto Russo takes this abstraction very seriously. In his model, people are born capitalists or workers, which translates in households either investing in an activity with a multiplicative risk or working for a wage with additive risk. Why that is so and what should be achieved with this is left unexplained. Households face an additional risk: they randomly switch between classes, the probability depending on wealth. The model is "closed" with exogenous and distinct propensities to consume for both classes. The model is then calibrated with parameters values not related to anything observable. The simulations reveal that if one starts with everyone having the same wealth, wealth heterogeneity then emerges. Well, that was unexpected... Even back in 1993, Mark Huggett had a much better model to explain heterogeneity in wealth.

We are turning into a rentier society again

Wouldn't it be nice to live on old money? One does not really need to work, or at least on a regular basis, one is worry free, and one gets to enjoy life at its fullest. But this is only a dream that is reserved to a preciously small elite.

Thomas Piketty, Gilles Postel-Vinay and Jean-Laurent Rosenthal show that about a century ago in Paris close to 10% of the population were in fact rentiers, that is, people who consume more than their labor income during their lifetime. They thrived in an economy where the return of wealth was substantially higher than the growth rate. And by the looks of it, it appears that we are heading into a similar situation, as a small proportion of the population is generating substantial wealth from labor income, wealth that cannot be spent in a lifetime and will be inherited by happy an idle descendants. Perhaps more importantly, existing wealth is enjoying far better returns than average wages are growing at, laying the seeds of a new rentier society. History repeats itself.

Obesity on the German labor market

Being obese makes you a social outcast, especially in countries were obese people are relatively rare. This can have consequences on the labor market, as there is plenty of evidence that handsomeness matters, for example. So are obese people discriminated against on the labor market?

Marco Caliendo and Wang-Sheng Lee look at newly employed people in Germany and find that there is not much evidence of discrimination there. Only obese (but not overweight) women may be suffering in the land of beer and wurst. Of course, one may question the validity of a study that must be relying on very few observations for a subgroup of the sample. Yet, surprisingly, half of the men and 37% of the women are considered overweight or obese, proportions I would never have imagined from walking around German towns. And with sample ages averaging in the thirties, they are relatively young too. As the survey sample is based on people who have been unemployed, I wonder whether the discrimination is rather in unemployment rather than employment.

Is it cheaper to live in poor economies?

If you are a rich country resident and travel to a poor country, you are continuously amazed how inexpensive life is there. One rationalizes this with the lower local wages which make domestic goods (and price discriminating imports) cheaper. Is this anecdotal evidence true in general? Does it hold across all countries?

Fadi Hassan finds that indeed rich countries have higher price levels. But once you go further down the development ladder, the statistical evidence is not that clear, and once you reach the lowest rungs, the cost of things could be increasing again. This analysis is performed using the ratio of purchasing power parity to the exchange rate, as measured in the Penn World Tables and finds that the best non-linear fit of the price-income relationship is not increasing for 40% of the countries. The challenge is now to understand why it is so.

Public pensions are not sustainable, even in Norway

By now, everyone must be aware that populations are getting older and that this puts some serious strain on pension systems. Unless one plans far ahead or is blessed with substantial sustained growth, some problems in financing retirement will appear. But there must be some place that is going to do fine, say a country with a forward-thinking government, a recently reformed pension system, a well managed endowment of natural resources and a small and smart population, like Norway. Right?

Wrong, say Christian Hagist, Bernd Raffelhüschen, Alf Ering Risa and Erling Vårdal. To come to this conclusion, they use generational accounting, which measures the fiscal sustainability of the public sector and in particular the publicly funded retirement pensions. The latter went this year through a significant reform, which includes pension indexation below wage growth, benefits adjusted to be actuarially fair if life expectancy increases further, and work incentives for elderly. It turns out the pension reform has helped substantially for the sustainability, about as much as the presence of the endowment of oil and natural gas. But that is not going to be enough, even with higher oil prices and an exceptionally well managed petroleum wealth. And for those hoping that future growth of the economy or higher fertility would help, well at least in the case of Norway this would barely help. To close the gap, a 17% increase in taxes would be needed, and they are already very high in this country. So, if Norway cannot make it, how could countries with inactive governments and little or poorly managed endowments make it?

Should we encourage business ownership?

Politicians claim left and right that small business owners are critical to the success of an economy. They woo them with various tax credits and by turning a blind eye to their opportunities to hide income from taxation. Yet, politicians also rewards large companies with generous tax abatements, especially when the relocate or just promise not to move away. So, in the end, who should be encouraged. the small business owner or the big conglomerate? In part, this is a question about whether it is better to have many self-employed workers or many employed workers.

Mirjam van Praag and André van Stel address this question by trying to determine the optimal business ownership from a sample of 19 OECD countries over 26 years. They proceed by estimating a Cobb-Douglas production function augmented with a business ownership rate, its square, tertiary education, as well as interactions of the latter with the formers. This is not a production function that has an interpretation for factor shares, it is rather a test of some relationships in the data. And by the implied non-linearity, it allows to computed from the regression coefficients what the optimal business ownership rate would be. On average, it is 12.5%, which is definitely not high, and it declines over time.

Furthermore, van Praag and van Stel find that countries with a higher proportion of workers with tertiary education enjoy a lower optimal business ownership rate, converging towards 11% when everyone has a university education (no gravediggers?). The interpretation they offer is that better educated people run larger firms. As business owners are a minority in a developed economy anyway and only the top business owners really matter for economic performance, I am not quite convinced by this argument, but it is apparently supported by microeconomic evidence. I would have rather thought that a more educated workforce is more specialized, and under such circumstances it is more difficult to be a business owner. The only exception are start-ups, which then either fails or are gobbled up by a larger firm.

Razor innovation in macroeconomics

Macroeconomics is sometimes like Gillette razors. There is regularly an innovative razor that happens to have more blades than the previous one. And once it gets out of hand, the new razor goes back to fundamentals and has only one blade, before the cycle starts again. In macroeconomics, there was this fad of adding more an more shocks to models until everything became very confusing and unidentifiable. So we returned to simple models (Occam's razor was the innovation) that became more powerful because of the presence of a market friction. Now, these search frictions are appearing everywhere, one-by-one or in pairs, and the latest generation of models has three frictions.

In a pair of papers, Etienne Wasmer alone and then with Nicolas Petrosky-Nadeau introduces search frictions on labor, credit and goods markets. The first is more of an exercise of style, showing it can be elegantly solved in steady-state thanks to block-recursiveness. The second paper is more interesting, as it looks at the dynamic properties of the model and shows that is can better account for the persistence of fluctuations in the data (what frictions are good at) and the volatility of labor flows. Interesting results, especially in the light of the pronounced lag in the recovery of employment in the US these days.

I am waiting for the four-friction model now.

Should immigration quotas be traded?

We all want to end world poverty, and a particularly efficient way to do this is to allow the free movement of people. Unfortunately, this often puts a burden on the receiving country, and thus immigration limits are set. But there is clearly a positive externality on the other countries from allowing immigrants in, as long as the others also care about world poverty. This implies that immigration quotas should be set higher.

To make this happen, Jesús Fernández-Huertas Moraga and Hillel Rapoport suggest a system of tradable immigration quotas, that mimics the market for pollution quotas. There is one difference, though, as migrants have preferences on where to go. Thus, there is a global number of migration slots put on the market and countries can trade them, paying for a slot elsewhere if local costs of immigration are particularly high. A central assignment authority attributes migrants to countries following their preferences and a particular assignment scheme.

This market allows to extract the price of immigrants to the host country as well as price the benefit of migration to world social welfare. Unfortunately, it does not appear immune to strategic behavior, as most bilateral assignment problems. But it seems to be a very promising step towards a better world, especially in the light of potentially large migration following climate change.

The welfare gain from inflation targeting

It is rather well accepted that transparency is preferred for policy, because it anchors better expectations, people generally do not like uncertainty, and discretion can lead to adverse biases compared to set policy rules. Yet, the United States exhibit little transparancy, with the Federal Reserve being one of the few western central banks not to declare some explicit policy target, and fiscal policy being as uncertain as ever. That would not be a big deal if the welfare costs were low, but you can think that there are high and in the case of fiscal policy are currenctly holding back the recovery.

Giorgio Di Giorgio and Guido Traficante are taking a closer look at the welfare benefits of inflation targeting. For this they use a model where households observe policy interest rates and do not know whether their changes are due to reactions to output gaps or shocks to the inflation target. Households are sophisticated, they use a signal extraction device to estimate the latent, unobservable variable. Yet, they still face substantial costs from the uncertainty. Money is not neutral because of Rotemberg pricing, a variant of Calvo pricing. Oh well, I guess this is what you need to do to get a result with some bite.

Households know there is a policy rule that determines the interest rate from the output gap (unobservable) and the inflation target (stochastic and persistent) as well as known preference and cost-push shocks. In other words, households know a lot about the structure of the economy and the shocks, except for the policy shock, but then somehow cannot figure out what the output gap is. The central bank can, though, but then has for obscure reasons a trembling hand when it comes to set its inflation target. That seems to be quite the opposite of what I would have thought: everyone is confused about the output gap, and only the central bank knows what the inflation target is. Instead of a story of households trying to disentangle output gap and inflation target from the interest rate signal, one would have a story of a central banker not quite sure what to do given the circumstances. Too bad, this could have been an interesting paper.

The military draft, mortality and education

The data sometimes work in mysterious ways and provide puzzling correlations that lead to interesting research questions. One such correlation is that exemption from military service leads to lower mortality later in life.

Piero Cipollone and Alfonso Rosolia find this while looking at a natural experiment following the 1981 earthquake in Southern Italy. Boys from the affected region were exempted from military service, and they were followed, along with non-exempted neighbors, to track their life and education. By concentrating on boys both sides close to the border of the exempt region, they find that those exempt ended up being more educated. I can easily believe that, as they were not spending some of their prime learning years hiding in bushes and peeling potatoes, and they were expecting a longer work life. But the exempt also have lower mortality. This is not due to a lower incidence of military accidents, it is rather linked to the higher school completion rates. In fact, the authors conclude that raising high school completion by 10 percentage points would lower mortality by one or two percentage points in the decade thereafter. That is impressive at that age.

The Internet did not raise a generation of loners

The image of the basement-dwelling World-of-Warcraft-playing loner is often shown as an example of the adverse impact of the Internet on social capital and in particular social interactions. Whether this is true is not so obvious, as the Internet also makes possible social interactions that could not exist before, as this blog shows in a limited way.

Stefan Bauernschuster, Oliver Falck and Ludger Woessmann study the impact of broadband Internet on social capital using a natural experiment in Eastern Germany. There, some choice by the telecommunications provider resulted in 11% of East German households to be on OPAL lines instead of DSL, which better supports high speeds. Using the German Socio-Economic Panel, they measure social capital with the frequency of going out, visiting friends and performing volunteer work. They find that Internet access has no visible impact on social capital. To the contrary, for children it seems to enhance social capital, possibly because it makes them aware of new opportunities to interact in real life. This is in stark contrast with television use, which has many times been shown to be detrimental to social capital, likely because it is a one-way communication, while the Internet can build two-way communication.

How should I lie?

Is it OK to lie? The usual answer is that it depends. Big lies are frowned upon, while small lies are somewhat tolerated. Does this necessarily mean I should avoid lying?

Gerald Eisenkopf, Ruslan Gurtoviy and Verena Utikal study the size of lies in an experimental setup. Their first observation is that it depends whom you are lying to. Honest people punish according to lie size, while chronic liars really do not care. Their second is that big lies are punished more than small lies. This is hardly surprising. What would have been more interesting to learn would be whether the punishment function is concave or convex, that is, whether the returns to scale are increasing or decreasing. In some sense we already have some idea about this by looking at tax penalties, which are usually proportional to the offense, plus a fix cost. And ultimately, one would want to compare the shape of the penalty function to that of the benefit function. Then I would finally know whether I should lie big or small.

State-owned banks in the US?

Many countries have state operated banks that support local development or other objectives that deviate somewhat from those of usual for-profit banks. No such institution exists in the US except for the Bank of North Dakota.

Yolanda Kodrzycki and Tal Elmatad study the Bank of North Dakota in the perspective of the feasibility of a similar bank in Massachusetts. They find that the BND is not a typical bank. While it favors local development, it rarely does so directly, but rather by helping local banks. It thus encourages a network of small and local banks, something that does not quite seem efficient to me. The BND was, however, not particularly useful in periods of crisis, like the agricultural crisis of the 1980s, because it also had financing difficulties. All in all, the bank of North Dakota is very different from state banks abroad, which offer all customer services like private banks and thus help regulate through competition some the excesses of private banking. The BND looks much more like existing development corporation that exist in most if not all US states. If Massachusetts just wants to em ulate North Dakota, it does not seem worth the large cost of the initial bond issue, especially in the current economics context.

Animals as forecasters

Futures markets and in particular prediction markets are a good way to hedge against various risks as well as establish what people really think about the likelihood of some event. As they a putting money on the line, these markets are deemed (and have proven) to be more really than surveys and polls. Of particular interest in this context was the short-lived "terrorism futures market" organized by the Pentagon, which was supposed to offer an additional tool for predicting terrorist threats, and which would allow those who could suffer from terrorism to buy insurance against it. Unfortunately, there was also a fear that threats could materialize because of the market, as people would try to manipulate it.

Adi Schnytzer and Yisrael Schnytzer point out that there is another potential for prediction markets: natural disasters. Of course, we humans are so far not particularly good at forecasting such events as earthquakes, but some animals have evolved a sixth sense in this respect that is rather underexploited. While it seems difficult for scientists to drum up money to study this, maybe because this technology does not seem credible or usable, the Schnytzers point out that if prediction markets are created for natural disasters, then funding would emerge if money is to be made. And this would also establish whether these theories have credibility.

Fiscal policy as insurance

The goal of fiscal policy is at the macroeconomic level to steer the economy towards efficiency and, depending on the country, to smooth somewhat economic fluctuations. It has long been debated whether this is desirable or possible at all, given the large delays in implementing public expenses. But changes to tax policies are quicker to put in place and implement. At the microeconomic level, the focus is more on the long term, again try to attain better efficiency as well to optimize some definition of fairness across economic agents, however this may be defined in the respective countries. These micro and macro aspects have largely been regarded as separate. This does need to be so.

Eduardo Engel, Christopher Neilson and Rodrigo Valdés look at the particular fiscal policy of Chile. This country is characterized, like many emerging economies, by wild fluctuations in economic activity. In this case this is triggered by changes in commodity prices, in particular for copper. The most important implication is that government revenue varies wildly (a macroeconomic impact) between 1 and 8% of GDP, which changes Chile's ability to redistributes across heterogeneous households (a microeconomic impact). Adhering to a balanced budget rule would have a dramatic effect, in terms of aggregate welfare it would be like renouncing to half of the copper revenue. The reason is that households' incomes is also correlated with copper revenue, and a countercyclical policy is then optimal. And to be the most effective, the poorest households are helped in hard times, both because they have the highest marginal utility from consumption and because they have the highest propensity to consume.

Chile has been pursuing so far something that is close to a balanced budget rule: expenses are related to a permanent income measure of income. This means expenses are relatively constant, except for the last years, where expenses grew significantly despite a reduction in copper prices. This appears to have worked well, in particular because the poor have been the target of this largesse, not the rich. That was stimulus spending done right. This paper shows how this can be done even better.

Do Italians trust the television or the judges?

In several countries, mass media have become, at least from my viewpoint, a dominant means of forming public opinion on just about anything. In the US it is particularly apparent that experts are less trusted by the public than media, or even less than people's prejudice. In politics, this is even more widespread, where media make or brake a politician, and politicians cater directly to the media. Imagine how things could turn when the politician owns the media. This is the current situation in Italy, where Prime Minister Silvio Berlusconi heads a formidable media empire and tries to fend off numerous accusations of corruptions and abuse of power (loosely speaking) that emanate from the judiciary.

Fabio Sabatini studies how much the Italian Prime Minister is trusted by the public. He finds that trust in television is by far the cleared determinant for trust in Berlusconi, and the second is lack in education, the third distrust in the judiciary. So much for Berlusconi claiming his empire has nothing to do with his repeated elections.

The child quality/quantity trade-off in the Industrial Revolution

Non-economists cringe when they hear us talking about investment in children and the quantity/quality trade-off in this regard. Yet, this is a very real aspect of child rearing pointed out by Gary Becker that is at the core of many models, and has been found wild in nature. This trade-off is though to be an integral part of the demographic transition, where fertility suddenly drops massively in the course of development.

Marc Klemp and Jacob Weisdorf look at data from Anglican parish registers from the 18th century that contain all sort of demographic data to look at the child quality/quantity trade-off during the Industrial Revolution. Theory tells us that if the returns to education and/or the cost of time (wages) get larger, parents switch from having many children with no education to few of them with better education. Klemp and Weisdorf's data indicates clearly that this trade-off is present: each additional sibling reduces by 8% the probability of a child eventually becoming literate. That is a strong effect, in particular considering the larger number of children at the time, and its rather large standard deviation during this time of transition.