Month: October 2014

Is recovery always slow after a financial crisis?

by  Tyler Cowen in

That has been the received wisdom, but it is now challenged by a new paper (pdf) by Christina and David Romer:

This paper revisits the aftermath of financial crises in advanced countries in the decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967-2007. The series is based on narrative assessments of the health of countries’ financial systems that were made in real time; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find little support for the conventional wisdom that the output declines following financial crises are uniformly large and long-lasting. Rather, the declines are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself when distress is particularly extreme or continues for an extended period, the aftermath of a crisis is worse.

There is Justin Lahart coverage here, including a contrast with Reinhart and Rogoff.

Was there mismatch unemployment during the Great Recession?

by  Tyler Cowen in

I remember this question being debated extensively circa 2009-2011, and those who said there was a (limited) role for mismatch unemployment were mocked pretty mercilessly.  Well, Sahin, Song, Topa, and Violante have a piece in the new American Economic Review entitled “Mismatch Unemployment.”  (You can find various versions here.)  It’s pretty thorough and state of the art.  Their conclusion:? “…mismatch, across industries and three-digit occupations, explains at most one-third of the total observed increase in the unemployment rate.”  The people thrown out of work could not be matched as well as the unemployed workers of the past.

Much of the matching problem was for skilled workers, college graduates, and in the Western part of the country.  Geographical mismatch unemployment did not appear to be significant.  Now, “at most one-third” is not the main problem, but it is not small beans either.  That’s a lot of people out of work because of matching problems.

Again, the Great Recession arose from a confluence of supply and demand problems.

State capacity and military conflict

by  Tyler Cowen in

There is a new paper (pdf) by Nicola Gennaioli and Hans-Joachim Voth, forthcoming in The Review of Economic Studies:

Powerful, centralized states controlling a large share of national income only begin to appear in Europe after 1500. We build a model that explains their emergence in response to the increasing importance of money for military success. When fiscal resources are not crucial for winning wars, the threat of external conflict stifles state building. As finance becomes critical, internally cohesive states invest in state capacity while divided states rationally drop out of the competition, causing divergence. We emphasize the role of the “Military Revolution”, a sequence of technological innovations that transformed armed conflict. Using data from 374 battles, we investigate empirically both the importance of money for military success and patterns of state building in early modern Europe. The evidence is consistent with the predictions of our model.

The pointer is from Mark Koyama.

Michigan markets in everything department of why not?

by  Tyler Cowen in

Oakley, Mi. is barely a town at 300 people, only one streetlight and, until recently, one police officer. The one cop was good at his job, reports Vocativ’s M.L. Nestel, until he was forced to step down after getting caught stalking a teenage girl.

In 2008, new chief Robert Reznick made some changes: he hired 12 full-time officers and started an enormous volunteer officer program which allowed lawyers, doctors and football players (from other towns) to work toward upholding the law.

One qualifies for this prestigious program simply by paying $1,200 to the police department. In return, you’ll get a uniform, bullet-proof vest and gun. For an additional donation, you’ll get a police badge and the right to carry your gun basically anywhere in the state, including stadiums, bars and daycares.

There is more here, via Larry Rothfield.

Everyone in development economics should read this paper

by  Tyler Cowen in

It is by Eva Vivalt and is called “How Much Can We Generalize from Impact Evaluations?” (pdf).  The abstract is here:

Impact evaluations aim to predict the future, but they are rooted in particular contexts and results may not generalize across settings. I founded an organization to systematically collect and synthesize impact evaluations results on a wide variety of interventions in development. These data allow me to answer this and other questions across a wide variety of interventions. I examine whether results predict each other and whether variance in results can be explained by program characteristics, such as who is implementing them, where they are being implemented, the scale of the program, and what methods are used.  I find that when regressing an estimate on the hierarchical Bayesian meta-analysis result formed from all other studies on the same intervention-outcome combination, the result is significant with a coefficient  of 0.6-0.7, though the R-squared is very low.  The program implementer is the main source of heterogeneity in results, with government-implemented programs faring worse than and being poorly predicted by the smaller studies typically implemented by academic/NGO research teams, even controlling for sample size.  I then turn to examine specification searching and publication bias, issues which could affect generalizability and are also important for research credibility.  I demonstrate that these biases are quite small; nevertheless, to address them, I discuss a mathematical correction that could be applied before showing that randomized control trials (RCTs) are less prone to this type of bias and exploiting them as a robustness check.

Eva is on the job market from Berkeley this year, her home page is here.  Here is her paper “Peacekeepers Help, Governments Hinder” (pdf).  Here is her extended bio.

The East 25 Years After Communism

by  Tyler Cowen in

That is the new Foreign Affairs piece by Andrei Shleifer and Daniel Treisman, and they argue that matters have gone strikingly well and are relatively normal.  Here is one excerpt:

Newspapers overflowed with accounts of soaring mortality amid the stress of transition. On average, however, life expectancy rose from 69 years in 1990 to 73 years in 2012. The speed of improvement was two thirds faster than in the communist 1980s. Russia’s life expectancy today, at 70.5, is higher than it has ever been. Infant mortality, already low, fell faster in percentage terms than in any other world region.

Eastern Europe is infamous for unhealthy binge drinking. However, average alcohol consumption fell between 1990 and 2010 from 7.9 to 7.6 liters of pure alcohol a year per resident aged over 14. There were exceptions — drinking rose in Russia and the Baltic states but even in Russia recorded consumption in 2010, 11.1 liters, was lower than that in Germany, France, Ireland, or Austria. (Of course, more drinking might escape the statisticians in the Slavic region.) Smoking among adult males was high – 42 percent on average but about the same as in Asia. In short almost all statistics suggest a dramatic improvement in the quality of life.

In short, almost all statistics suggest a dramatic improvement in the quality of life since 1989 for citizens of the average postcommunist country — an improvement that rivals and often exceeds those in other parts of the world.

You will note that the published version in Foreign Affairs has slightly different wording and organization.

Some Good News on Patents

by  Alex Tabarrok in

Further evidence of a dramatic slowdown in patent litigation activity in the United States is provided today in data published by Unified Patents, the entity whose business is based on helping SMEs fight frivolous patent suits. According to the research, which covers the third quarter of this year (June to September),  there was a 23% drop in the number of suits filed compared to the second quarter, and a 27% year-on-year reduction.

The findings come just weeks after data released by Lex Machina showed that there had been a 40% fall in patent suits in September 2014 as compared to the same month in the previous year. Commenting to IAM on the reasons for the decline, Lex Machina founder Professor Mark Lemley claimed that much of it could be attributed to the Supreme Court’s Alice v CLS decision. The Alice judgment was handed down towards the end of June.

More here.

Alice has made a difference as well as the cheaper post-grant challenge procedure in the AIA. Once the first software patents make it through, however, there will be an uptick as people learn the new system. Still this is good news especially for software patents but we have a way to go on the larger issue of IP, including copyright.

Here is the updated “Tabarrok curve“.

Tabarrok Curve

In the medium-run, supply- and demand-side stagnation stories are very similar

by  Tyler Cowen in

Paul Krugman argues the contrary here.  But let’s say there was a supply slowdown starting in 1999 or so, as reflected in wage and jobs data, masked a bit by the real estate bubble of 2004-2006 and with some of the productivity figures inflated for domestic purposes due to outsourcing.

If there is less produced, there are eventually perceived negative wealth effects.  What happens to demand?  It goes down, in this case with a lag because of credit.  Yes, it is a big mistake to assume Say’s Law always holds but it is an even bigger mistake to think it never holds.  Supply slowdowns are bad for demand, and they likely are bad for credit creation too, which hurts demand further yet.

There is no contradiction in a model where both aggregate demand and aggregate supply curves shift in unfavorable directions!  And in the medium run, each of these shifts pushes the other curve around too.

Let’s not forget that economies have real wage and price stickiness in addition to nominal stickiness.  That is another channel through which negative supply shocks can hurt aggregate demand and throw people out of work.

Krugman is worried about policy implications:

If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).

It’s not either/or.  Circa 2008-2009, we should have had a higher inflation or ngdp target.  We could do structural reform too, whatever you might think that means, obviously opinions will differ.  We could build productive infrastructure, boosting both supply and demand, and with little risk of default on the debt.  And yes, we might wish to cut some other government expenditures in the process (farm subsidies anyone?), with looser money to pick up the slack.  What we shouldn’t do is all that Keynesian ditch digging.  Even if you agree with the argument for it (and I don’t), it so hurts the reputation of legitimate government investment that we shouldn’t be going near it.  There are many, many other better things to do, including giving our government a reputation for careful project selection looking forward.

Simple textbook economics indicates that the AD-AS distinction makes the most sense in the short run.  Of course hysteresis is a mechanism by which low AD can over time translate into low AS as well, but the causation runs both ways, don’t forget that.

Is the cost disease of services an illusion?

by  Tyler Cowen in

That is a new suggestion made by Alwyn Young in the latest American Economic Review.

The cost disease argument suggests that some services do not augment their productivity very readily (e.g., the barber), and furthermore the demand for many services is income elastic and price inelastic, so with economic growth services take up a rising percentage of gdp over time.  The relative cost of producing service output rises.  And since services are more sluggish in productivity, and being weighted more heavily in output, we can expect economy-wide productivity rates to decline.

Young’s argument is to draw out the implications of the heterogeneity of workers.  Let’s say that a worker’s skill in one sector is only loosely correlated with his skill in some other sector.  That will mean when individual workers have comparative advantage in a sector, they also are likely to have absolute advantage in that same sector.  The typist really is a better typist than the lawyer.

Now let’s go back to the services sector.  It expands over time and sucks in labor by offering higher relative wages.  That draws in more individuals with low comparative and also low absolute advantage in that sector.  More concretely, the system ends up pulling in a lot of losers into law and medicine, while we are left with only the very best factory workers still on the job.  Or think of all those mediocrities who flooded into punk rock in the early 1980s.  It’s a bit like a Peter Principle.

The services sector will appear less efficient, but what is called “underlying true levels of productivity growth” — taking into account the average efficacies of the workers present in the two sectors — might not be changing much at all.  In other words, a quite different mechanism can generate the same observation as Baumol’s cost disease.

The paper presents plenty of industry-level evidence that this declining efficacy of service workers is indeed the case.

An ungated version of the paper is here, the published, gated version is here.