Pregnant women should not fast during Ramadan

As Jim Heckman and consorts have much emphasized, schooling and labor market outcomes are determined to a large extend very early in life, before school even starts. This puts a considerable burden on mother to provide the right environment for their children, and this is sometimes very difficult for them. With single motherhood or in the absence of sufficient paid maternal leaves, for example, it often becomes impossible to provide a nurturing environment. But one can go back even further. Birth weight is also a very important determinant, and anything that influences it matters.

Douglas Almond, Bhashkar Mazumder and Reyn van Ewijk show that it may not be sufficient to look at the final birth weight but also at how the fetus was nourished on a daily basis. During the month of Ramadan, practicing Muslims fast during daylight, and this includes pregnant women. The analysis shows that Ramadan during early pregnancy is related to lower test scores for the child at age seven. One may think this has to do with cut-off months for school entrance, but the analysis was performed looking at Pakistani and Bangladeshi children in England, thus there is a control population with the same cut-offs and socio-demographic characteristics but no Ramadan observance: Caribbean children. Beyond Muslims, this implies that nutrition is very important in early pregnancy, but this is very difficult to control as pregnancy is not apparent yet. Which means nutrition is important at any time for women in child bearing age.

A history of national accounting

We use national account data without realizing the efforts that lie behind the construction of these account. And frankly, it is sometimes like sausage making, but less and less so as the United Nations have managed to enforce rather widely its standards. But getting to these standards has been a very process.

Frits Bos documents the history of national accounting over three centuries. He shows that significant efforts and advances in national accounting arouse from two kinds of needs: understanding recent major crises and the increase of influence of the state and its policy making. To fix an economy, you need to know what is wrong with it, or at least the symptoms. To set policy, one needs measures to establish goals and how they have been reached.

Reclassification risk in health insurance

The American health care system has his fair share of problems, a prominent one being health insurance. One particularly frustrating one is when premiums are significantly raised after a health event, so-called health insurance reclassification. Economically, this can be explained by the fact that the insured has revealed being of higher risk. But it seems self-evident that there a large room for improvement in insurance outcome if such reclassification would not occur, that is, if premiums would be almost invariant to health outcomes.

Not so, say Svetlana Pashchenko and Ponpoje Porapakkarm. Their points are that 1) with most people insured under group coverage of their employer, relatively few people are subjects to reclassification; 2) for the latter, means-tested government transfers cushion well the shock of reclassification (or loss of insurance). To come to this conclusion, they use a stochastic overlapping generation general equilibrium model, trying to match the major institutional features of US health care (including Medicaid, uninsureds, private and employer-sponsored insurance) and calibrated using Medical Expenditure Panel Survey.

Pashchenko and Porapakkarm find that introducing guaranteed renewable insurance contracts with constant premiums lowers the proportion on uninsured from 25% to 19%, the difference taking such contracts. Thus it appears that, not surprisingly, eliminating premium fluctuations is welfare-improving. But the welfare gain is very small. For one, These new insurance contracts tends to be more expensive, especially in the first years when standard insurance premiums are low for healthy (and young) people, who tend also to be more liquidity constrained. If there is no guaranteed renewable insurance contract, the government provides a similar insurance: Medicaid, which has essentially the same conditions but is free and asset-tested. The fact that it is a last resort insurance provides the right smoothing benefits for extreme cases, much like insuring premium fluctuations does. The latter is just a little broader, because there is no asset test, and hence the welfare improvement is small if it is priced actuarilly.

How public debt has been liquidated

Many are now claiming that public debt is much too high and that serious austerity measures are absolutely necessary to keep them in check and even reduce them. Beyond the question on whether public debt matters at all and what consequences of this austerity regime may be, another important question is whether austerity is the right way to reduce public debt. It is not like this would be the first time economies grapple with such high and even higher debt/GDP ratios. The war effort in WWII lead most economies to be in much direr situations than today, yet they managed to get out of it without too much trouble. How did they do that?

Carmen Reinhart and Belen Sbrancia pour over the data and notice a common trend: keeping interest rates low with a little bit of inflation works miracles. The negative real interest rate keep debt servicing at a minimum, while a moderate but high than usual inflation eats little by little the principal. And inflation was not even a surprise at the time, and investors accepted low returns on government bonds. This may have to do with a somewhat limited range of investment options, both because investment markets were not as well developed as today and because investors were coaxed or openly forced to buy government bonds at reduced yields. But the situation is not that different today, as everybody is frightened by stock markets and finds refuge in public bonds, money markets and simple savings accounts. And interest rates are really low, too! Now we just need a little bit of inflation.

Economics and facts

I have sometimes expressed here my frustration over the disconnection between research and reality. The scientific process is about trying to explain some data. Any paper that just tries to see what could result from a model without looking at data or restrict parameter value in any way is useless. What do we learn if a model tells us anything could happen with some parameter values, but the authors are not capable of telling us in which range those parameter values lie? And what use is a model that is not, or worse cannot, be tested in any way?

Harald Uhlig opines on the relationship of Economics and reality from four different angles. The first is Economics as a science, where he has largely the same arguments as me above. Economics is also an art, as it is vain to find a great unified theory of Economics, as life is too complicated. One can only hope to explain observations in batches, and then the most elegant theory wins. But that theory still has to be tested against data, at least for the observations at hand.

Economics is also rhetoric. Indeed, convincing others is a big part of the success of a theory, and how that theory does with explaining the data is unfortunately not always central. This competition of ideas also spills over into politics, as Economics is in the end about giving policy advice. And this is where data and empirical relevance becomes the least important.

Uhlig then goes on to relate this to various aspects of macroeconomics. While there is much introspection in macroeconomics these days, I wish he would have defined Economics to be broader than that. Some areas of Economics need indeed to be much more closely related to data and trying to explain empirical observations. Game theory would be a prime example. public economic theory as well, if not much of microeconomic theory. Mainstream macroeconomic theory has always tried to relate to data, which is probably why it has changed over the decades: some crucial facts have changed.

Triple-blind refereeing

Until it became too easy to find research papers on the Internet, the norm in academic publishing was to subject any journal submission to a double-blind refereeing process. The author does not know the referee, and vice-versa. Most, but not all journals have abandoned the double-blind for single-blind, as referees can figure out anyway who the author is. Well, most of the time.

And now the new concept, triple-blind refereeing, where the editor does not know who the referee is. Indeed, I got a paper to referee under my nom de plume. And I just cannot figure out who the author is.

Why would the editor choose me? Indeed, what are the chances that the paper's topic would fall in my research competences? While I do something like refereeing on this blog, and I have written on this topic, it is not like I can claim to be an expert on every topic, or even on any topic. And the paper is certainly not that bad that the editor just expects me to trash it and help get it out of the pile.

Maybe the editor could just have waited for me to discuss it here. But wait, the paper is not available on the Internet, so I would never see it. Yes, that is the ticket: the editor lost patience waiting for my comments.

Anyway, I will referee this one, just because of the unique situation. I will do my best to write a good referee report. But I cannot promise I will write more referee reports under my pen name. What would be in it for me? Writing a report anonymously to both author and referee, and the report remains forever secret, even the fact that I wrote it? And no, I will not publish it here. I do not take suggestions on what I should write about.

Differentiated carbon taxation

In the face of pollution externalities, there is no doubt that carbon taxes are the best solution. What is more tricky is to establish the level of those taxes. A particular aspect of this is whether carbon taxes need to be differentiated across countries. For example, should it be the same in developed and developing economies? For context, see the current riots and strikes in Nigeria after the removal of fuel subsidies.

Antoine d’Autumne, Katheline Schubert, Cees Withagen take on the question at an international level and argue that that optimal tax design would call for differentiated taxes with lump-sum transfers across countries. While the tax has a world-wide component, the country-specific one stems from local externalities, of course, and from the distortions from cost of public funds. If lump-sum transfers are not possible, international inequities would also have to be captured by differentiated taxes. So, yes, rich countries do need to tax carbon more, even probably even much more than poor ones.

On advances in econometric orthography

Economists use jargon, and the origin of that jargon is sometimes nebulous. Most of the time, we borrow existing words and twist their meaning. But also create new words, especially in econometrics where new acronyms keep popping up and are used as words. And in some cases, words change.

Alfredo Paloyo takes the case of "heteroskedasticity" or "heteroscedasticity" and its varying orthography over time. I am myself confused about which is the right way to write it and have been inconsistent in the past. My confusion appears justified: spelling this word goes through fads, as documented by parsing through the Google book library. The second spelling was most popular until 2001, and the second is mostly preferred since. What is puzzling is that "homoscedasticity" dominates by a wide and persistent margin "homoskedasticity," indicating that authors are rather inconsistent in their spelling. For adjectives, "c" dominates "k" widely as well. What is then so special about "heteroskedasticity?" Paloyo mentions the impact of a few influential papers using that spelling. But that does not explain the inconsistencies.

Why India should let engineers and doctors emigrate

One of the great frustrations of developing economies is that they spend scarce resources follow everyone's advice by educating their brightest citizens only to see them leave the country for greener pastures. And those pastures are mostly developed economies, where immigrants from the third world are often better educated than the locals. Is it still worth it to push higher education in developing economies?

Yes, would say Oded Stark and Roman Zakharenko. They base this on a simple two sector growth model. One sector, the "engineers," is productive to the point of exerting a positive externality on total factor productivity. The other, the "lawyers," does not. Workers can choose how much education to get and which career to pursue. Once you allow emigration, the general level of human capital increases, as the prospects of a foreign standard of living is a strong incentive to stay longer in school. The interesting part is that everyone is better off: engineers are better and lawyers are fewer. And such a result is not just abstract theory. I reported before on empirical examples of beneficial brain drain, for example in Fiji or Finland.

The corporate tax Laffer curve

Given the mobility of the headquarters of financial holding firms, there is much more diversity in corporate tax rates than tax competition would call for. Looking at OECD countries, the effective tax rate peaks at 40% in Japan and the US, while it is half this, or below, in other countries. Given the high mobility, would it be government revenue maximizing to reduce the tax rate in the US or Japan? In other words, are these two countries to the right of the Laffer curve peak?

Kazuki Hiraga asks this question for Japan, but in a closed economy, thus ignoring international tax competition. Japan is still on the wrong side of the corporate tax Laffer curve. Decreasing the tax not only increases tax revenue, it leads to more growth through stronger capital accumulation. Add tax competition, and you have even better reasons to cut the corporate tax rate. Hence, the argument likely also applies to the US.

But wait a moment, let us have a look at the model. It is a standard real business cycle model with various distortionary taxes. The collected revenue is rebated in lump-sum fashion to households, which own the firms. In other words, this is a model where taxes a never optimal. Indeed, nothing useful is done with tax revenue, and there is no redistribution going on. No need for fancy solution techniques to understand the results...

On the ineffectiveness of a fiscal stimulus

When is a fiscal stimulus going to work? If you listen to economists these days, it would be difficult to know. One reason is that protagonists quickly become sidetracked by the associated political discourse. The other is that one would first need to define the fiscal stimulus. Depending on whether it is provided by tax rebates, public expenses or tax delays makes a big difference. Also, who is targeted matters a lot. Thus one needs to get the specifics of the fiscal stimulus to give a proper answer. The general rule, though, is that a fiscal stimulus works best if the credit or liquidity constraint households obtain additional cash. They are going to spend it right away. The other households would reduce consumption only slightly in anticipation of future increased taxes due to a wealth effect. In the aggregate, consumption would then go up, but not a lot. But there can be other circumstances where it would work better.

Thorsten Drautzburg and Harald Uhlig study a situation similar to the one now in the Unites States: nominal interest rates getting very close to zero. Then, they claim the fiscal multipliers are still rather small, but may be positive despite distortionary taxation. Now contrast this with the results of Lawrence Christiano, Martin Eichebaum and Sergio Rebelo, who argue that the fiscal multipliers become very large (and positive) when nominal interest rates are close to zero. Who is to believe? Both use a rather elaborate DSGE model, in both cases estimated. Both use the Calvo fairy. Or a Taylor rule. The first has financial frictions, while the second has investment adjustment costs, which should come to the same. If anybody can figure out why the results are so different, I would appreciate it.

It particular it would be interesting to understand why now would now be the wrong time to institute an austerity regime. To me, it would even make perfect business sense: why not build infrastructure when the cost in terms of financing and labor are low? Keep in mind that every unemployed worker that is hired does not need unemployment benefits...

Male circumcision and risky sexual behavior

There is a well-known phenomenon that states that when an activity becomes safer, people will respond with riskier behavior. The classic example is the use of seat belts that has lead to more aggressive driving (although there is a claim that this example is wrong). Now switch to another risky behavior: sex. It is well established that male circumcision leads to a significantly lower transmission probability of AIDS. Is risk compensation also happening here?

Nicholas Wilson, Wentao Xiong and Christine Mattson look at recently circumcised males in a region of Kenya and find that their sex behavior is less risky than the uncircumcised control group. This is not a selection effect, as circumcision has been randomly assigned. The authors think that the circumcised ones have become less fatalist about future life prospects and thus changed their behavior for the better (this is also why you want to provide health insurance conditional on not dying from AIDS). I wonder though whether the circumcision has made them more aware of the risk of AIDS as well.

Athletes are more competitive, but also more destructively envious

Student athletes are better than average students, despite having some sports severely dragging down this record. My impression is that these students know that they have less time to study and thus do not fool around like the others. They develop superior time management skills and thus obtain better results with less time to study.

Another aspect I did not think about is that athlete are more competitive. It is in part selected and in part learned: they get into sports because they are competitive, and they become competitive because they are athletes. Jérémy Celse shows that this is a mixed blessing, though. Once they have graduated, they also get an edge from being competitive and used to compete. However, athletes are less cooperative and find satisfaction in hurting others. Using an experimental approach, Celse finds that (self-declared) athletes behave anti-socially and with more jealousy than others when learning they did worse than their experiment partners (or opponents). In other words, do not count on athletes to be team workers. It is unclear whether this applies also for those practicing team sports. The variable was captured, but I see no result using it.

Are government workers more motivated?

In times if tight fiscal conditions, it is easy to criticize public employees. Civil servant have the reputation of being overpaid, underworked, lazy, unmotivated and enjoying too many benefits. I will not address all of this concerns here. I already covered overpaid, let us talk about unmotivated.

Using the World Values Survey, Sarah Smith and Edd Cowley find that public sector workers are intrinsically more motivated. To some extend this is not surprising, as one self-selects into the public sector when one is not that motivated by profits and money, but rather what public service stands for: serving others. But this does not apply to every country. The more corruption there is, the less motivated are civil servants. Indeed, in a corrupt government, public service takes a back seat to earning more money (or influence). How can one the explain the bad rap civil servants gets from private sector workers in the least corrupt economies? Maybe it is the public just reflecting its own values about work on the public workers, unjustifiably.

More on the long term consequence of slavery in Africa

Since the start of this blog, one of the most popular posts has been one that analyzes the long-term costs of slavery in Africa. Of course, it is about the consequences in regions where slaves were taken from. There is also a region where they have been taken to, that is South Africa. What has been the impact there?

Johan Fourie writes that farmers taking slaves prospered thanks to economies of scale of specialization, to the point that they were considered by some to be the richest in the world at the time. But this advantage did not last long, as the use of slave labor discouraged further immigration from Europe. And as education opportunities were limited to (free) whites, large inequalities were maintained through a period where human capital became more important. These inequalities and the large fraction of poorly educated citizens, even after emancipation and the end of apartheid, stills drags the South African economy down, because institutions emerged to perpetuate these inequities.

This persistent impact of inequality in human capital is consistent with evidence from the US, as I reported in a previous post, with a recent update by the same authors just published recently. Graziella Bertocchi and Arcangelo Dimico expand on their use of US panel data. In short, they find that the education gap between whites and blacks at the county level today is determined by the initial gap in 1940, with only little convergence since. And the initial gap is largely explained by prevalence of slavery in earlier years.