On the superiority of secularism

The US presidential election season in upon us, and of course religion will again be a major factor. While this is rather unique in the Western world that the religion of a candidate would matter, this fact seems very natural to Americans. The basic logic is that a god-fearing politician is less likely to abuse his power, especially in the position of president, where he cannot vie for a better position through exemplary behavior. That seems to be a slam-dunk for religious candidates, yet experience from the rest of the Western world seems to contradict this. In fact in many other countries, overtly religious candidates are suspected of having allegiances primarily with the religion, not the country.

Pavel Ciaian, Jan Pokrivcak and d'Artis Kancs go one step further and try to compare developed economies, that generally rely on secular institutions to enforce laws and rules, to developing economies, that more frequently draw on informal institutions, in particular religious ones. They find that religion-based institutions are weaker because thy hinge on credibility which is difficult to build and easily lost. Secular ones have an explicit and formal legal enforcement mechanism that can also adapt to changing circumstances. The latter means also that religious enforcement systems are best for static societies, while dynamic and growing economies should adopt secular systems. I am not quite sure causality goes this way, but correlations certainly support this.

Recessions are costly

Robert Lucas has pushed the idea that business cycles are not that costly that they would need intervention, and the real business cycle literature, at least the early one, has anyway advocated that the government should stay out of this kind of business. It is true that long term growth and understanding why some countries are so poor are more important questions, yet one cannot shake the feeling that recessions are costly. The recent one is more severe than usual and can highlight how its costs can be high, and those costs may persist for some time if the much longer than usual unemployment durations translate into significant losses in human capital and ultimately wages.

Steve Davis and Till von Wachter provide some new evidence of a somewhat different kind. Studying US workers displaced in mass-layoffs, they calculate the present value of a job loss in terms of pre-loss wage years. When the unemployment rate is below 6 percent, the loss is of 1.4 years. Above six percent, as is typical in a recession, the loss is 2.8 years, i.e., much much more than the increase in unemployment duration. One can only imagine that these numbers are going to be much worse for the last recession. And keep in mind that these higher numbers apply to more people in a recession. And it matters in aggregate: if the unemployment rate goes from 5 to 10%, it means 5% of the population loses 1.4 additional years of wages. That is 0.7% of national labor income, or 0.5% of GDP. Not peanuts, and I have not even factored in anything about curvature in utility.

Why the young demand more social insurance than older generations

Take up rates for various social insurance schemes generally increase from generation to generation, even when their is no change to the rules. That must be either because new generations are more feeble and, say, tend to become more frequently or earlier handicapped, or that they have a higher demand for social insurance benefits, say, because they are feeling more entitled (one can have different interpretations).

Martin Ljunge build a model where younger generations are influenced by what older generations did in the following way: Deciding whether to apply for benefits depends on a "psychic cost" that depends on the take up rate of the previous cohort. The model is the estimated using individual data from the sick leave program in Sweden (I think, this is never explicitly mentioned). It is found that, indeed, having parents taking advantage of social benefits lowers the cost on one doing so oneself. This effect makes up half of the long term increase in the take up rate.

Precaution versus prudence

Why do people accumulate precautionary savings. Conventional wisdom tells us this happens because people face some shocks to income and they are averse to risk and prudent. Now, we need to be careful here. Risk aversion means that one does not like fluctuations in utility (say, from consumption). Prudence means that one dislikes bad outcomes. Hence they do not mean exactly the same thing, and one could conceive precautionary savings without prudence.

Agustín Roitman shows an example where this works. To do this, he uses a new class of preferences that allows to distinguish clearly risk-aversion and prudence: ac_t - bc_t³ (it may not be easily visible, this is linear consumption less cubed consumption with some coefficients). It has a relative coefficient of prudence of -1 (ratio of third to second derivative), which is constant and independent of risk aversion. The negative value also means this economic agent is imprudent. As Roitman shows, this agent will still accumulate precautionary savings, hence prudence is not necessary. And except for these assumptions on the utility function, the results holds quite generally.

Malthus visits Rwanda

Rwanda has always struck me as the perfect example of a Malthusian economy. A dense population where land is systematically divided up among descendants, leading to tiny lots that are barely sufficient for survival.Lots are so small that new capital for its exploitation is not relevant, and no technological improvements have any significant bite. In the end the land can only support a population at the edge of famine.

Marijke Verpoorten brings an intriguing connection between the Malthusian theory as applied to Rwanda and the genocide of 1994. Using regional data, she finds that the areas where there was the most urgent population pressure (through density or growth) were also the ones with the most killings. In a way, society was taking care of a business nature and famine could have.

On the mobility of academics in Europe

Europe has suffered a brain drain of top academic scientists that it has tried to reverse by offering better work conditions. The main competitor in the United States, where top scientists are able to attract easy funding and universities are accommodating. While pertains to relatively few people, they are considered to be key, as their reputation can attract better colleagues and graduate students, ultimately improving the rankings administrators vie for. Given the large amounts of money spent by the European Commission and its country counterparts, it is important to understand what motivates scientists to move.

Edward Bergman does this using a survey of 1800 European academics considered to be among in the top institutions. Those who exhibit higher levels of loyalty or "voice" (opinionated on local affairs) tend to stay and try to improve things internally , if necessary. The others prefer to leave when local conditions worsen, and then they have no particular loyalty to stay in Europe when they are just looking for better working conditions. All this is not too surprising. What I find more interesting is that scientists top priority is research opportunities followed by salary, and language preferences is very minor. European universities cannot count on scientists coming home any more.

The surprisingly low border effect of the BigMac

The Economist's BigMac Index is widely used as an indicator of purchasing power parity. I have never been convinced that it is an appropriate indicator, though. But studies keep using it, and teachers keep mentioning it.

The latest is Anthony Landry who uses it to study the border effect, i.e., how a border adds to the cost of transportation. That assumes that BicMacs are all produced in one location and then shipped to all stores worldwide. This clearly is not the case, both for the raw material and for the assembly. While the raw material is produced centrally in each country, it is only rarely passing a border due to regulation and preferences for local product. I thus do not see the point of estimating borders effects with BigMacs.

The recent collapse in the trade of durable goods

One important feature of the recent crisis has been a significant drop in international trade. There is nothing surprising in this, as it is a regular feature of recessions that imports decrease more than GDP, as they are mostly composed of intermediate and investment goods. And it is well known that investment is very volatile through the business cycle. This are all well-known facts, that are easy to replicate with standard international business cycle models.

Dimitra Petropoulou and Kwok Tong Soo look at this trade drop from the perspective of trade theorists. They use a small open economy model (hence prices are exogenous) with two-period overlapping generations (hence we are talking about long-term movements, not business cycles) with tradable durable goods and a non-tradable non-durable good. There is a fix endowment of labor and capital that can freely be allocated between sectors (hence there is no investment, or savings). Agents can freely borrow and lend within a generation, but not between generations or with abroad.

Why do I mention this? Because Petropoulou and Soo try to reinvent the wheel and make it square. There is a large international business cycle literature that has gone through all this with much more realistic assumption and delivered quantitative results. And this not the first time I see that trade theorists could learn a lot by reading a little bit outside their bubble.

The history of negative nominal interest rates

There is much talk about the zero bound on nominal interest rates and how this is constraining the policy options of many central banks. How can of course ask oneself why there would be such a restriction on nominal interest rates. Would it be possible to tax (nominal) money holdings? It is certainly conceivable to have negative interest rates on some bank accounts, and it has happened before. Switzerland and Germany imposed negative rates on non-resident account holders in the 1970's, and the Swiss National Bank is currently contemplating doing this again (New York Times). Sweden imposed them recently on mandatory reserve holdings of commercial banks. There is, however, very little theory on this.

Cordelius Ilgmann and Martin Menner try to make sense of the existing literature on the topic. There are essentially two strands, according to them: the first is started with Silvio Gesell in the 19th century and proposes taxing money, the second lies within the very recent money-search literature.

Gesell was the proponent of an anarchist free-market utopia, the free-economy movement. He proposed that bank notes would need to have a weekly stamp affixed to remain valid, amounting to a 5% tax every year. The stated reason is that while other goods depreciate naturally, money does not and may be withheld from circulation. The tax alleviates that, and should in particular be used in times of crisis, because it increases the velocity of money and prevents its hoarding. That argument can be made for today, but it neglects the influence of inflation on all this, and that is crucial.

The recent money-search literature uses taxes on money holding as a proxy for inflation. My understanding that this is really for analytic convenience but in no way a policy proposal. Indeed, what this literature cares about is the real return on money, not the nominal one. But Ilgmann and Menner run with it and believe there is an endorsement of a Gesell tax.

PS: a third way is discussed in the paper, recently proposed by Willem Buiter. It is based on the silly idea that the various function of money are taken over by separate currencies and backed up by equally silly arguments with money in the utility function.

Four years, 1000 posts

I am now entering the fifth year of blogging, and this is the 1000th post, which means I have discussed about one thousand papers. Personally, I find this an incredibly high number. In fact there are so many that I once discussed a paper a second time, forgetting I already did take care of it before.

This is also my yearly opportunity to reassess whether what I am doing here makes sense at all. I obviously get no outside reward for the blog, but that is OK. Only the top bloggers get recognition, and I am not one of them. So it is all about personal gratification, and I think I am still happy about doing it. It is sometimes a struggle to find the time to put things on "paper", but as I still enjoy it, I'll continue for another year.

This year of blogging was dominated by the Bruno Frey saga, which I believe has attracted quite a few new regular readers. That is noticeable because readers from Germany, Switzerland and Australia are much more frequent now. The blog seems also to have an unusually strong and loyal readership in Slovenia.

If you wonder what the most popular posts during this year were, here they are:

1. On the ethics of research cloning
   
2. Why boards keep bad CEOs
   
3. Keep CEOs off outside boards
   
4. Do we need awards in Economics?
   
5. The Bruno Frey bubble
   
6. Economists did see the bubble coming
   
7. What is an MBA worth?
   

I am also encouraged to see that discussion of the posts has picked up compared to previous years. Again, Bruno Frey has helped here, but it is also apparent in the regular posts about Economics research. Unfortunately, spam comments have started flocking to this blog, and I apologize that some make it live before I notice them.

Measuring optimists and pessimists

According to Wikipedia, the Oxford English Dictionary defines optimism as "hopefulness and confidence about the future or successful outcome of something; a tendency to take a favourable or hopeful view." This is a poor definition, I think, because it mixes two concepts: a) that one has subjective probabilities on good outcomes higher than what objective ones would warrant, 2) that one is less sensitive to uncertainty. Put it that way, it becomes quite obvious that economists have the tools to separate the two and can thus document what I would call true optimism (or pessimism), a tendency for favor good outcomes in expected utility.

David Dillenberger, Andrew Postlewaite, and Kareen Rozen do exactly this by appealing to Savage's subjective expected utility. If we look at choices of an individual across lotteries, then we should be able to back out both the subjective probability distribution and the aversion to risk. This can actually be a big deal, for example when one wants to give advice in a risky environment. The advisor will try to understand the preferences of the subject, but ignoring optimism/pessimism may lead to a very erroneous assessment of risk aversion. This can be crucial in assessing, say, investment strategies, health care options, or career choices.

Anonymous applications on the Economics PhD market. Really?

There is unfortunately still some discrimination left in labor markets. Literature has shown that in particular race and gender may matter in some cases, as well as beauty. While this is usually demonstrated by looking at the significance of some characteristic dummies that should not matter in hiring or wage decisions, another way to test for discrimination, at least in hiring, is to compare anonymous job applications to open ones. This is costly to do, and it may infringe some ethical issues, hence this is a rare exercise.

Annabelle Krause, Ulf Rinne and Klaus Zimmermann did this for applications of Economics PhDs to a position in a European institution. I am really puzzled what they expected to learn from such a peculiar market. Indeed, part of the recruitment pool was anonymized before being submitted to the recruitment team. This is very difficult to do properly, as CV, papers and reference letter have plenty of mentions of names and gender. And how to hide that when a candidate has published or is previously known to recruiters? And of course, this can only test up to the selection for the live interview, which is very early in the recruitment process.

In addition, it is very unlikely to find discrimination in such a specialized market. One, recruiting in an academic environment is usually closely scrutinized for discrimination. In fact I have been highly annoyed by the burden it takes to prove one has not discriminated. Two, I would even argue there is reverse discrimination, as recruitment committees are often under strong pressure to hire from "under-represented" groups. Three, the institution that agrees for this exercise is not discriminating consciously, or it is very foolish.

The results are not surprising. No discrimination is found, except a little reverse discrimination for women. It is impossible to generalize the results, as the sample is so small and so specific to this recruiting institution. I really do not see the point of this paper.

Banking crises and income inequality

With the Occupy X movement, discussion about the unequal distribution of income has flared up. At the same time, we are still not over the banking crisis. Several people have linked the two, saying that the large banking sector has lead to more income inequality and that the rich have benefited form the crisis at the expense of the poor. We probably do not yet the data to corroborate any of this, but we have data that allow to look at income inequality through other banking crises.

This is what Luca Agnello and Ricardo Sousa set out to do with a panel dataset from OECD and non-OECD countries. They find some regularities: there is a run-up of income inequality before the crisis hits especially in non-OECD countries; it declines fast thereafter, especially in OECD countries; better access to credit reduces income inequality; and the size of government has no impact on income inequality. The estimates of the paper are rather crude, there is just a lag on the Gini coefficient. I am sure one can tease out more interesting dynamics with a structural vector auto-regression. But the results are still interesting as is.

One more argument for taxing unhealthy activities

Whenever an activity exerts a negative externality on others, you want to tax it. For example, sin taxes are in place or are proposed for smoking, eating junk food or drinking soda. The reasoning is that these activities are bad for health, and thus end up costing society, even when there is no socialized health care. The fact that these unhealthy people tend to live shorter only partly offsets the direct effect of the externality.

Catarina Goulão and Agustín Pérez-Barahona explain that there is another good reason to tax unhealthy food: unhealthy eating habits are transmitted from a generation to the next even when there is no genetic reason for this to happen. This can also within a group of socially interacting people, which gives obesity or smoking the characteristics of an epidemic. To break this vicious circle of learning, the price mechanism has to come to the rescue. So let's impose more or new sin taxes. We could use the revenue, apparently.

Social security and the increase in US health care costs

Health care expenditures increase faster than inflation, and I have already offered several explanations for that. But there are more, and they work in rather subtle ways. Today's theme is social security.

Kai Zhao builds a large general equilibrium overlapping generation model to quantify the impact of the introduction of social security in the US on health expenditures. And it is substantial, at 43% of the increase since the fifties. How can this happen? One mechanism is that social security transfers income from the young to the old, and the old have a much higher propensity to spend on health. A second one is that with social security, the utility during retirement years is higher, and thus people want to make sure to have more of those years. Interestingly, the depressing impact of social security on capital accumulation is far too small to counteract the first two effects.