Industrial Revolution in Britain: it was thanks to human capital

Despite the fact that it happened about 200 years ago, we are still puzzling why the Industrial Revolution happened, why it started in Britain and it happened at that moment. A sample of previous work relevant to this has been discussed on this blog: 1, 2, 3, 4. While all this is old history, it is still kind of relevant, as we are also trying to understand how to get the least developed economies to get through a similar revolution. The circumstances are different, but lessons from two centuries ago may be useful.

Morgan Kelly, Cormac Ó Gráda and Joel Mokyr add another piece to the puzzle. British men were significantly better fed and taller than their continental counterparts. They likely had better cognitive skills, too, as we know today that they correlate positively with physical health. And, the distribution of these positive traits was such that a significant share of the population had the right characteristics to participate in the Industrial Revolution. That was not the case elsewhere. Thus, good human capital and a good distribution of it are necessary for the Industrial Revolution, but likely not sufficient.

Procrastination is a strong predictor of academic performance

I believe that perseverance and timeliness are the secret to success, and foremost so in school. And I believe these are the qualities that brought me to where I am now, and I hope these qualities have also transpired on this blog. But ,y belief may not be general wisdom or even scientifically established. Thus, I am happy to report on a study that confirms at least part of my credo.

Marco Novarese and Viviana Di Giovinazzo use data on how promptly astudents have enrolled for university to forecast their future academic performance, and the forecast is quite good. Of course, promptness likely correlates with plenty of other positive student characteristics the authors cannot measure. And of course, the result is not too surprising. But I feel comforted in my belief and my bias in selecting studies that confirm my prejudices is thus reinforced.

Give girls a bicycle

It is well known that girls from developing countries face hurdles in their schooling experience. This goes from subtle issues during their periods, curricula geared towards boys, and household work to plain denial of access to schools. While some of this has to do with cultural issues that are difficult to overcome with (economic) policy, some help could be surprisingly easy. It happened before in public health, my favorite example being telling kids to wear shoes eradicated hookworm from many parts of the world.

Karthik Muralidharan and Nishith Prakash have a recommendation, and that is to give girls a bicycle. They base this on an experiment they ran in India, where girls were offered a bicycle if they continued into secondary education. This helped overcome traditions that would not let girls out of the village and increased enrollments by 30% and closed the boy-girl gap by 40%. The authors also claim this is more cost-effective that the traditional cash transfers because bicycles have positive externalities, such as the safety of girls during commutes and more generally empowering them. As with any such experiment, one can question whether the result can be generalized, but it is interesting nonetheless.

PS: As several readers noted by email (but could have commented), this is not a randomized experiment. Rather, the authors used an initiative conducted by the government of Bihar. I apologize for the confusion.

Why Keynes dominates Hayek

I generally find debates about schools of economic thought annoying, especially when it is all about adoration of some dead economist while ignoring all the progress we have made since his contributions. Unfortunately, these dead economists keep coming up in the public debate, I think because these are the people non-economists are familiar with, from basic economics classes and popular readings.

Kristina Spanting studies the back-and-forth in popularity between Keynes and Hayek in light of the past 80 years or so of economic history. Keynes was all about shorter term solutions to crises, while Hayek had a longer term vision of things, and would not bulge from it no matter what the circumstances. Accordingly, their popularity in policy circles has oscillated depending on the need to react to a crisis. Keynes is an easy sell to politicians in such times. The electorate is asking them to do something, and Keynes provides the justification for that. And all the work economists have done since Keynes (and Hayek) is brushed aside just when you should draw the most on it. Sad.

The brain drain from financial liberalization

The financial sector is not riding high in popularity polls lately. First, compensation is deemed excessive. Second, the general public often does not perceive the benefits of a financial industry. The most common error there is the idea that finance plays a zero-sum game: anything it gains is necessarily taken away from others. Finance allows a better reallocation of resources and funds to the most productive businesses, and this raises overall productivity. But as it is well rewarded for this, it seems to be attracting perhaps an excessive number of top talents who could, at the margin, be more productive in other sectors. This brings us to a third issue: the financial sector is hiring away the best people from other sectors.

Christiane Kneer studies this inter-sectoral brain drain by looking at the consequences of financial deregulation on sectoral productivity. The assumption here is that financial deregulation attracts top talent to the financial industry because it allows the design and management of new and complex financial instruments. She finds that industries that rely the most on human capital are hurt: after an episode of financial liberalization, they have lower labor productivity, lower value added growth and lower total factor productivity. This is what happens when, for example, a software engineer moves to finance to exploit arbitrage in trade by gaining micro-second advantages over competitors. The social benefit of this arbitrage is close to zero, and some industry lost a great software engineer.

Marginal tax rates in Sweden

Whenever high marginal tax rates are discussed, the example of Sweden is brought forward. And typically the episode where they where close to 100% on labor income. But this has not always been so high, and it is certainly not the case now. What is the history of tax rates in Sweden?

Gunnar Du Rietz, Dan Johansson and Mikael Stenkula look back at 150 years and reconstruct marginal tax wedges for top and average earners. Tax wedges are different from tax rates in that they also incorporate other contributions, such as for social security and payroll taxes. I learned from this study that Sweden was in fact a very low tax country at the start of the 20th century, but this all changed with WWII, a succession of crises and the push for the welfare state that culminated in the 1960s. This change of attitude towards taxation and redistribution was relatively quick, and may have lead to excesses that have been built down since the 1990's. The paper also has a very detailed description of the tax system in Sweden over this period.

There should be more female mayors

It is well known, and I have documented it before, that women behave differently from men in politics, in particular when it comes to policy priorities. While the various examples I have discussed before are interesting, it is difficult to ascertain that they generalize. Indeed, politics is fraught with social and local norms. We need more studies.

Fernanda Brollo and Ugo Troiano look at municipal elections in Brazil and concentrate on those where the mayoral seat was hotly contested between a male and a female candidate. One can thus consider that the electorate was essentially similar whether the female or the male won. The outcomes are damning for men. Whenever a woman became the mayor, health outcomes are better, corruption is lower, and the municipality gets more federal funding. To illustrate how men are politicizing relatively more, Brollo and Troiano find that male mayors up for reelection will hire many more temporary workers, a clear sign of electoral patronage.

Why invest in cows if their return is negative?

In some developing economies, cattle are used as store of value. This is because there is no other good asset available as financial markets are not developed. Cattle has its drawbacks though, as it can die from disease or hunger, usually at the worst moment, can walk away or be stolen, and thus needs constant guard. This implies that their return could actually be negative.

Santosh Anagol, Alvin Etang and Dean Karlan find that cows and buffaloes in rural India have a negative return of a whooping 64% respectively 39%. If you take the extreme assumption that labor has no return, then their returns are minus 6% respectively plus 13%. How is that possible? The authors offer several potential explanations: measurement error, preference for home-made milk, the lack of other saving vehicles, in particular those that allow commitment to keeping those savings, improvement in social and religious standing, and preference for lotteries (small probability of striking it rich with female cattle). The one I like the most is that marginal return of labor is actually zero. Indeed, farms do not operate like firms. As they are typically family-operated, everyone "works" even if that means being idle most of the day. This idle person may have a productivity close to zero, and may thus be used to guard cattle.

Identifying monetary policy "shocks"

I have always found the empirical monetary policy literature rather frustrating. It is entirely based on the premise that one can identify monetary policy shocks. First, I am not sure what is really meant by a shock. Is it any change in a policy variable? Not changing it may be a surprise, as we recently witnessed by with the recent FOMC decision not to throttle quantitative easing. And how much a change is anticipated matters as well. The recent emphasis on forward guidance makes the interpretation of an interest change very different from the surprise actions from a few years ago. Second, the empirical identification of those shocks seems doubtful at best. Either you take a VAR and interpret residuals as shocks (never mind those will be significantly different across specifications), or you try to quantify some narrative of policy decisions, sorting out rather subjectively what was a surprise and what was expected. Third, a monetary policy shock should be measured differently under different policy regimes. There is no point on focusing on the Federal funds rates (or a Taylor rule) when the policy focuses on the money supply, for example.

The reason for this rant is that I came across a paper by Martin Kliem and Alexander Kriwoluzky who try to reconcile the VAR and narrative approaches, which of course is impossible. What they highlight though is that both are fraught with error. They find this by plugging the narrative measure into a VAR and they conclude that there is measurement error in the narrative measure and misspecification error in the VAR. That should surprise no one, but needs to be pointed up, with so many people relying blindly on these instruments.

The price of producing in a sinful sector

Many people avoid investing in certain types of firms they associate with unethical or sinful behavior. That would include tobacco companies, high polluters, alcohol, fire arms and defense industry, etc. That should lower the stock market return of these firms, but there is of course some arbitrage that negates these return differentials. Yet, is there some way in which being in a sinful sector is detrimental?

Stergios Leventis, Iftekhar Hasan and Emmanouil Dedoulis found one, and that is the cost of auditing. Auditing firms are extremely sensitive to their own reputations, and who they do business with is part of their reputation. The authors also argues that auditing firms perceive that sin firms bear higher business risk, perhaps because they deviate from social norms and require more scrutiny (risk of litigation, need for higher cash reserves). In the US, such companies end up paying a whooping 20% more in auditing and consultancy fees. I wonder where else they face higher costs (it is known they have higher capital costs). This means that their stock price should still be affected despite arbitrage.

Entrepreneurship in Liberia

I have recently mentioned that entrepreneurship cannot be taught, which implies entrepreneurship classes have little value. What should these entrepreneurship professors then do? Do research on entrepreneurship? It turns out that is also of questionable value.

Case in point, the latest paper of Johan Venter. He wants to understand how entrepreneurship emergences in post-conflict economies and lead to new jobs. To this end, he travels to Liberia and surveys ... entrepreneurship professors who, of course, testify about strong interest in entrepreneurship classes. Never mind that taking such classes has no impact on entrepreneurship outcomes, Venter concludes that entrepreneurship should get more emphasis throughout the curriculum. That came out of nowhere, or rather out of a pitiful survey with 28 respondents.

Memorable goods

In macroeconomics, one distinguishes between non-durable and durable consumption goods. This distinction is important, as the cyclical nature of the two is very different. Durables are very volatile, as households like to postpone their acquisition in recessions. Non-durables are extremely smooth, however. The later is what most models have in mind when thinking about consumption, while the first are more like investment goods, but at the household level.

Rong Hai, Dirk Krueger and Andrew Postlewaite think we should add a third category: memorable goods. These are non-durable goods that may not last long physically, but we keep good memories about them and thus they continue to provide utility in the future. In essence they are also durable goods, but they are not counted as such in national accounting. Some examples the authors provide are Christmas gifts whose memories last through the year. The same applies to vacations, going out, clothes, and jewelry. Using the consumption expenditure survey, the authors find that memorable goods lie somewhere between durables and non-durables in terms of cyclical properties. As they account for about 14% of outlays, their presence matters quantitatively. In fact, they can fully explain some observed deviations from the permanent income hypothesis. A paper to remember and cherish for a long time.

Building a reputation as online seller

A good reputation is difficult to earn and easy to lose. And reputation matters, think of monetary policy, auditing, medical doctors, restaurants, and politicians. With the Internet, online reviews and reputation have become important as well. I certainly take them into account before buying online. From the point of view of a seller, how do you build a reputations?

Ying Fan, Jiandong Ju and Mo Xiao got access to data to the major Chinese e-commerce platform to study the evolution of seller reputation. In particular, they have been able to trace the strategies and histories on sellers. They show that a good reputation is a great benefit, but that new sellers have a very hard time establishing it. Imagine you start with no reputation whatsoever and are competing with established sellers. To gain an edge, you need to resort to sales and attract attention in various ways, such as cross-listing your product all over the place. This is a lot of effort, and the authors argue that there is too much of it.

This reminds me of the early days of this blog. Being anonymous, I obviously started with no reputation and had to build it from scratch. With barely any readers, I started adding links to unrelated, but interesting stuff to attract more. That did not work, although this has worked for others (restaurant reviews come to mind). It took several years for readership to really pick up, and I thought several times about abandoning during that time.

Flying in Europe and North America, puzzling differences

I have recently had the opportunity to fly extensively across both Europe and North America, and it has struck me how different the experience was. It is also puzzling me why this is so.

Let me first highlight the differences I observed. On almost all counts, flying in Europe seems superior. The aircraft are newer, they are equipped with entertainment systems or individual monitors, they serve meals, and flight staff is attentive. Airports are not overcrowded and well-connected to cities, usually by train or subway. Security is rather smooth and security personnel seems "normal".

Contrast this with North America, where the fleet is old and noisy, nothing but a magazine is offered as entertainment, everything but non-alcoholic drinks is nickel and dimed (and the airline's credit card is constantly peddled to you), and flight staff seems tired or disgruntled. Airports are full to the brim and impractical, in particular you have to rent a car or get an expensive taxi to get anywhere. Security is obnoxious and its personnel seems quite uneducated.

Even for transatlantic flights, there is a noticeable difference on similar counts between US and European airlines.

And with that, flying is less expensive in Europe, at least in my experience. Labor and fuel costs appear to be higher there, and I do not think European airlines are saving on their aircrafts as they are newer. Personnel, in particular, seems to have much better working conditions. A Delta stewardess, for example, told me she had to take a vacation day (one of 10 a year) to get a visa to fly overseas for Delta. And she is only paid when aircraft doors are closed. The dismal situation of US pilots is well known. I heard no similar complaints in Europe.

With all this, US airlines are doing very badly. They seem to have higher prices, lower costs and provide fewer services. How is this possible? Is it because there is more competition from rail and low-cost airlines in Europe? Is it because American airlines have some liabilities in their luggage, like large pensions or large overhead? The days of state subsidies for national airlines are long gone in Europe, so that cannot be an explanation either. I am left puzzled.

What are the arguments for hosting sports mega-events?

I have argued several times already that hosting sports mega-events does not have a lasting impact and that the current impact is limited to the sectors providing directly services to the event (exhibits 1, 2, 3). Yet, politicians continue to come up with rationales why such events should be hosted locally and why public funds should be devoted to them. Is it that we economists are missing something here, or that the politicians are fooling everyone?

Marcel van den Berg and Michiel de Nooij observe that the immediate financial or economic gain from hosting is negative, thus one needs to finds arguments for hosting elsewhere. They highlights a series of biases among politicians that makes them commit to events they cannot afford. First, politicians commit early, before realities about what it implies have sunk in. Politicians thereafter rarely change opinions. Second, they are swayed by arguments about positive externalities like revitalizing areas or building otherwise useful infrastructure. But you can do all this without a mega-event. Third, they see only success stories. Fourth, the bidding process for a mega-event leads to a winner's curse like in any auction. Fifth, media are obviously biased in favor of hosting. Reporting on such events is their livelihood. Sixth, such mega-events provide excellent opportunities for "redistribution" of public funds to lobbyists. Seventh, it is all about pride. What a costly way to provide that.