Big Picture
Culture, Institutions and the Wealth of Nations
Yuriy Gorodnichenko & Gerard Roland
NBER Working Paper, September 2010
Abstract:
We construct an endogenous growth model that includes a cultural variable along the dimension of individualism-collectivism. The model predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect may offset the negative effects of bad institutions on growth. Collectivism leads to efficiency gains relative to individualism, but these gains are static, unlike the dynamic effect of individualism on growth through innovation. Using genetic data as instruments for culture we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in biology and neuro-science. The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions.
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Friedman's Nobel Lecture and the Phillips Curve Myth
James Forder
Journal of the History of Economic Thought, September 2010, Pages 329-348
Abstract:
In his Nobel lecture, Friedman built on his earlier argument for a "natural rate of unemployment" by painting a picture of an economics profession which, as a result of foolish mistakes, had accepted the Phillips curve as offering a lasting trade-off between inflation and unemployment, and was thereby led to advocate a policy of inflation. It is argued here that, in fact, the orthodox economists of the time often did not accept Phillips' analysis; almost no one made the mistakes in question; and very few advocated inflation on bases vulnerable to Friedman's theoretical criticisms. The Phillips curve was put to various uses, but advocating inflation was hardly amongst them. It is suggested that one lasting result of the uncritical acceptance of Friedman's history is to limit what appears to be within the reasonable range of views about macroeconomic policy.
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Did France Cause the Great Depression?
Douglas Irwin
NBER Working Paper, September 2010
Abstract:
The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This "gold hoarding" created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.
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Military Spending and Economic Well-Being in the American States: The Post-Vietnam War Era
Casey Borch & Michael Wallace
Social Forces, June 2010, Pages 1727-1752
Abstract:
Using growth curve modeling techniques, this research investigates whether military spending improved or worsened the economic well-being of citizens within the American states during the post-Vietnam War period. We empirically test the military Keynesianism claim that military spending improves the economic conditions of citizens through its use by politicians as a countercyclical tool to reduce the negative effects of economic downturns. However, due to deindustrialization and the emergence of the "new military," there are reasons to believe that military spending will not effectively improve economic well-being during the post-Vietnam War era. Using longitudinal data we find that states with high levels of military spending are better equipped to stave off the deleterious effects of economic recession than are states with lower levels of military spending.
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Beyond GDP? Welfare across Countries and Time
Charles Jones & Peter Klenow
NBER Working Paper, September 2010
Abstract:
We propose a simple summary statistic for a nation's flow of welfare, measured as a consumption equivalent, and compute its level and growth rate for a broad set of countries. This welfare metric combines data on consumption, leisure, inequality, and mortality. Although it is highly correlated with per capita GDP, deviations are often economically significant: Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries are farther behind due to lower levels of life expectancy and higher levels of inequality. In recent decades, rising life expectancy boosts annual growth in welfare by more than a full percentage point throughout much of the world. The notable exception is sub-Saharan Africa, where life expectancy actually declines.
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Estimated Macroeconomic Effects of the U.S. Stimulus Bill
Ray Fair
Contemporary Economic Policy, October 2010, Pages 439-452
Abstract:
This paper uses a multicountry macroeconometric model to estimate the macroeconomic effects of the U.S. stimulus bill passed in February 2009. The analysis has the advantage of taking into account many endogenous effects. Real U.S. output is estimated to be $554 billion larger when summed over the 12-year period 2009:1-2020:4 (0.29% of the total sum of output). The average number of jobs is 509 thousand larger (0.37%). There is some redistribution of output and employment away from 2012 to 2015. At the end of 2020, the federal government debt is larger by $637 billion in real terms (the debt/GDP ratio is larger by 3.19 percentage points), which may increase the risk of negative asset-market reactions.
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Measuring the Output Responses to Fiscal Policy
Alan Auerbach & Yuriy Gorodnichenko
NBER Working Paper, August 2010
Abstract:
A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. Using a variety of methods and data sources, we provide three insights. First, using regime-switching models, we estimate effects of tax and spending policies that can vary over the business cycle; we find large differences in the size of fiscal multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently in relation to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers.
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Complexity and the productivity of innovation
Deborah Strumsky, José Lobo & Joseph Tainter
Systems Research and Behavioral Science, September/October 2010, Pages 496-509
Abstract:
Innovation underpins the industrial way of life. It is assumed implicitly both that it will continue to do so, and that it will produce solutions to the problems we face involving climate and resources. These assumptions underlie the thinking of many economists and the political leaders whom they influence. Such a view assumes that innovation in the future will be as productive as it has been in the recent past. To test whether this is likely to be so, we investigate the productivity of innovation in the United States using data from the U.S. Patent and Trademark Office. The results suggest that the conventional optimistic view may be unwarranted.
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International Differences in Fiscal Policy During the Global Crisis
Agustín Bénétrix & Philip Lane
NBER Working Paper, September 2010
Abstract:
We examine the cross-country dispersion in fiscal outcomes during 2007-2009. In principle, international differences in fiscal policy may be related to differences in optimal fiscal positions, funding constraints, political economy factors and fiscal control problems. We find that the decline in the overall and structural fiscal balances have been larger for those countries experiencing larger increases in unemployment and where credit growth during the pre-crisis period was more rapid. However, there is no systematic co-variation between fiscal outcomes and a larger number of other macroeconomic variables and country characteristics.
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The Composition of Government Expenditure: Economic Conditions and Preferences
John Creedy, Shuyun May Li & Solmaz Moslehi
Economic Inquiry, forthcoming
Abstract:
This paper examines the question of why the composition of government expenditure differs among democratic countries and to what extent it may be explained by differences in economic conditions or preferences. A simple overlapping generations model, which allows for a range of relevant factors, is constructed to examine the division of expenditure on public goods and a transfer payment under majority voting. The model yields a closed-form solution for the majority choice of the expenditure ratio. An empirical examination suggests that income inequalities play a minor role while different preferences for public goods reflecting cultural differences across countries may play an important role in accounting for the substantial variations in expenditure patterns.
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Anthropic Shadow: Observation Selection Effects and Human Extinction Risks
Milan Ćirković, Anders Sandberg & Nick Bostrom
Risk Analysis, forthcoming
Abstract:
We describe a significant practical consequence of taking anthropic biases into account in deriving predictions for rare stochastic catastrophic events. The risks associated with catastrophes such as asteroidal/cometary impacts, supervolcanic episodes, and explosions of supernovae/gamma-ray bursts are based on their observed frequencies. As a result, the frequencies of catastrophes that destroy or are otherwise incompatible with the existence of observers are systematically underestimated. We describe the consequences of this anthropic bias for estimation of catastrophic risks, and suggest some directions for future work.
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Wealth accumulation and factors accounting for success
Anan Pawasutipaisit & Robert Townsend
Journal of Econometrics, forthcoming
Abstract:
We use detailed income, balance sheet, and cash flow statements constructed for households in a long monthly panel in an emerging market economy, and some recent contributions in economic theory, to document and better understand the factors underlying success in achieving upward mobility in the distribution of net worth. Wealth inequality is decreasing over time, and many households work their way out of poverty and lower wealth over the seven year period. The accounts establish that, mechanically, this is largely due to savings rather than incoming gifts and remittances. In turn, the growth of net worth can be decomposed household by household into the savings rate and how productively that savings is used, the return on assets (ROA). The latter plays the larger role. ROA is, in turn, positively correlated with higher education of household members, younger age of the head, and with a higher debt/asset ratio and lower initial wealth, so it seems from cross-sections that the financial system is imperfectly channeling resources to productive and poor households. Household fixed effects account for the larger part of ROA, and this success is largely persistent, undercutting the story that successful entrepreneurs are those that simply get lucky. Persistence does vary across households, and in at least one province with much change and increasing opportunities, ROA changes as households move over time to higher-return occupations. But for those households with high and persistent ROA, the savings rate is higher, consistent with some micro founded macro models with imperfect credit markets. Indeed, high ROA households save by investing in their own enterprises and adopt consistent financial strategies for smoothing fluctuations. More generally growth of wealth, savings levels and/or rates are correlated with TFP and the household fixed effects that are the larger part of ROA.
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Xun Cao
International Studies Quarterly, September 2010, Pages 823-854
Abstract:
This paper studies policy changes in capital taxation by focusing on policy interdependence induced by network dynamics at the international level. The empirical findings indicate that the competition mechanism induced by network position similarity in the network of portfolio investment and that of exports causes policy diffusion in corporate taxation; the socialization mechanism (policy learning and emulation) induced by network position proximity in the IGO networks also drives policy changes, and the evidence is much stronger in the IGO networks that facilitate policy learning than in those that facilitate emulation. The paper also discusses explicitly empirical challenges to incorporate network characteristics into connectivity matrices in spatial lag models often used to study policy diffusion. It suggests that students of policy diffusion should discuss as explicitly as possible the assumptions and procedures to construct connectivity matrices and present results from alternative specifications: our conclusion on the strength of policy diffusion is often sensitive to the choice of connectivity matrices.
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The Income- and Expenditure-Side Estimates of U.S. Output Growth
Jeremy Nalewaik
Brookings Papers on Economic Activity, Spring 2010, Pages 71-106
Abstract:
The two official measures of U.S. economic output, gross domestic product (GDP) and gross domestic income (GDI), have shown markedly different business cycle fluctuations over the past 25 years, with GDI showing a more pronounced cycle than GDP. This paper reports a broad range of results that indicate that GDI better reflects the business cycle fluctuations in true output growth. Results on revisions to the estimates, and correlations with numerous other cyclically sensitive variables, are particularly favorable to GDI. The most recent GDI data show the 2007-09 downturn to have been considerably worse than is reflected in GDP.
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Disentangling collective trends from local dynamics
Marc Barthélemy, Jean-Pierre Nadal & Henri Berestycki
Proceedings of the National Academy of Sciences, 27 April 2010, Pages 7629-7634
Abstract:
A single social phenomenon (such as crime, unemployment, or birthrate) can be observed through temporal series corresponding to units at different levels (i.e., cities, regions, and countries). Units at a given local level may follow a collective trend imposed by external conditions, but also may display fluctuations of purely local origin. The local behavior is usually computed as the difference between the local data and a global average (e.g, a national average), a viewpoint that can be very misleading. We propose here a method for separating the local dynamics from the global trend in a collection of correlated time series. We take an independent component analysis approach in which we do not assume a small average local contribution in contrast with previously proposed methods. We first test our method on synthetic series generated by correlated random walkers. We then consider crime rate series (in the United States and France) and the evolution of obesity rate in the United States, which are two important examples of societal measures. For the crime rates in the United States, we observe large fluctuations in the transition period of mid-70s during which crime rates increased significantly, whereas since the 80s, the state crime rates are governed by external factors and the importance of local specificities being decreasing. In the case of obesity, our method shows that external factors dominate the evolution of obesity since 2000, and that different states can have different dynamical behavior even if their obesity prevalence is similar.
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Is econophysics a new discipline? The neopositivist argument
Christophe Schinckus
Physica A: Statistical Mechanics and its Applications, 15 September 2010, Pages 3814-3821
Abstract:
Econophysics is a new approach which applies various models and concepts associated with statistical physics to economic (and financial) phenomena. This field of research is a new step in the history and the evolution of Physics Sciences and the question about the disciplinary characteristics of this field must be asked. At first glance, it might appear that economics and econophysics share the same subject of research (that of analysis of economic reality). In this paper I will use neopositivism to show that econophysics is methodologically very different from economics and that it can be considered as a separate discipline. The neopositivist framework provides econophysics with some arguments for rejecting mainstream economics.