From Enrico Spolaore and Romain Wocziarg
one may erroneously infer a major role for specific national institutions in Africa, even though, as shown by Michalopoulos and Papaioannou (2010), national institutions have little effect when looking at the economic performance of homogeneous ethnic groups divided by national borders.
The survey article focuses on very long persistence in differences in productivity across different ethnic groups. Pointer from Jason Collins.
Bennett writes,
Very briefly, and simplistically, the Industrial Revolution happened when it did because the English (and their available capital) were occupied gathering the plentiful low-hanging fruit available with pre-industrial (or what Mumford would call “eotechnic”) technology. Iain [Murray]’s ancestors had all the coal they could profitably dig and transport by human, animal, and wind power for a century or so before they needed steam pumps to be able to exploit deeper mines, and steam locomotives to pull coal from mines further from the Tyne, than they had before. Crude steam engines had been around for a while; suddenly it became profitable to build and use them. The Industrial Revolution happened when financing it became the best available use of capital. The middle class had had plenty of honor and dignity for centuries before that — due to the legacy of Anglo-Saxon culture that held that there was no such thing as “noble blood” — even if your father held a title, you were legally a commoner unless and until your father died and you inherited the title, unlike on the Continent.
From a Facebook thread discussing this post.
A Social Security reform that addressed the program’s structural and fiscal problems would begin by transforming today’s complex benefit formula into a two-part system consisting of a savings account and a flat universal benefit. Such a system could be implemented gradually — applying only to new workers as they entered the work force, and so very incrementally and slowly replacing today’s system without breaking any promises already made to working Americans.
First, everyone in this new system — rich and poor alike — would be given an opportunity and a strong incentive to save for retirement. Each worker would be enrolled automatically in an employer-sponsored retirement account such as a 401(k) or 403(b). Workers would contribute at least 1.5% of pay, matched dollar for dollar by their employers. Universal retirement savings accounts would allow Social Security to focus its efforts: If everyone saved as they should for retirement, Social Security could concentrate its resources on low earners who needed the program the most.
Read the whole thing. To me, it comes across as centrist. But he would described as a nutter by most of the people who I would describe as nutters.
The blogosphere is more likely to criticize DSGE models, whereas the profession is more likely to see such models of as providing discipline for any business cycle explanation, Keynesian included.
…On all of these questions my views are closer to those of the specialists in the economics profession.
I count myself as strongly opposed to DSGE models. In my view, macroeconomic models are much more speculative and metaphorical than microeconomic models. Take supply and demand. In microeconomics, I believe that when you draw a supply and demand diagram, you are providing an interesting theoretical description that has empirical use. But “aggregate supply and demand” does neither.
DSGE constrains macroeconomic models to describe a “representative agent” undertaking “dynamic optimization.” This constraint does not make macro models any less speculative or metaphorical. The advocates of DSGE implicitly claim that a certain mathematical approach is both necessary and sufficient to make macro models rigorous. I view that claim as a baloney sandwich.
That seems to be what John Cochrane is advocating.
In the 19th century, private banks issued currency. A few crises later, we stopped that and gave the federal government a monopoly on currency issue. Now that short-term debt is our money, we should treat it the same way, and for exactly the same reasons.
Read the whole thing. He argues against the conventional approach to financial regulation, which is to allow banks to issue risk-free liabilities with an explicit or implicit government guarantee and try to regulate their risk-taking on the asset side.
While I agree with those who favor a financial system with more equity and less debt, I would prefer a different approach to getting from here to there. I would like to phase out the subsidies to debt finance. These subsidies include deposit insurance, too-big-to-fail, and the favorable tax treatment of debt. All of these ideas are fairly drastic relative to current policy, but they are less drastic than outlawing outright the contracts that create short-term debt.
Consider this recent paper by Harry DeAngelo and Rene M. Stulz.
Debt and equity are not equally attractive sources of bank capital. Debt has a strict advantage because it has the informational insensitivity property – immediacy, safety, and ease of valuation – desired by those seeking liquidity. High bank leverage is accordingly optimal when the MM model is modified to include a price premium to induce (socially valuable) liquidity production.
Or, in my terms, the nonfinancial sector wants to issue risky liabilities and hold safe assets, and the financial sector accommodates this by doing the reverse.
Another recent essay, Taming the Megabanks, comes from James Pethokoukis.
The story is here and http://blogs.discovermagazine.com/d-brief/?p=1771. The claim is that mortgage borrowers with poor math skills defaulted at a much higher rate than other mortgage borrowers.
Levels of IQ and financial literacy showed no correlation with likelihood to default, but basic math skills did.
I refuse to draw the inference that the reason these folks defaulted was that they misunderstood math. First, we are talking about a sample size of 339 borrowers. That is a very small sample. Second, there are a bunch of explanatory variables that are highly correlated: credit score, IQ, and math score. That makes it much harder to separate the effect of any one of those variables. Someone else using the same data might try slightly different specifications and get very different results. Especially in such a small sample.
Do I think that low math skills are correlated with default? Absolutely. Do I believe that there is a high marginal contribution to default of low math skills, conditional on other known factors such as credit score (and IQ, if known)? Not until this sort of study is replicated in other samples using other specifications.
So writes Henry Olsen.
Post-Moderns like unions (50 percent favorable), Obamacare (only 16 percent think it will have mainly a bad effect), and the U.N. (60 percent favorable). They are much less likely than Libertarians to say government should be smaller (85 percent vs. 55 percent), and are significantly less likely to say that cutting major programs should be the main way to cut the deficit (47 percent vs. 8 percent). They much prefer expanding alternative energy (79 percent) to producing more fossil fuels (13 percent). And they are more likely than Libertarians to support gun control (54 percent vs. 18 percent) and government efforts to fight childhood obesity (62 percent vs. 24 percent).
His point is that this group, which he claims helps elect Republican governors in some states, is not really libertarian. However, I would point out that they are not really conservative, either.
What positions can Republican politicians take that add more voters than they turn off? Conservatives tend to say, “soften the economic libertarianism, keep the social conservatism.” Libertarians tend to say the opposite.
I keep thinking that the swing voters are what people call “low-information voters.” I picture them as responding to looks, personality and media characterizations. I don’t think ideas matter so much.
I don’t think I ever wrote this view up, but I was of the same opinion nonetheless.
He refers to a post by Paul Krugman arguing that the Fed’s purchases were not what was holding bond rates down. Cowen notes that this week’s rise in interest rates increases the probability that they were wrong.
I would add myself to the list of economists who have some ‘splainin’ to do. I am always willing to be counted among those who doubt the Fed’s power over interest rates, especially long-term real rates. By the way, Scott Sumner used to say that a rise in long-term interest rates could be a bullish indicator. Would he say that now? UPDATE: No.
Or, take Knut Wicksell. He’s not around to defend himself, but I interpret him as saying that the real interest rate will tend to move in the direction needed to reach the natural rate of unemployment. The real interest rate only rises if we are in danger of going below the natural rate of unemployment. In what way has that danger increased this week?
I suppose one could tell a story that says that the market respects the Fed’s forecasting ability. Further, suppose that the market’s view of the latest Fed moves is that the Fed has a surprisingly upbeat forecast for the economy, or else a surprisingly downbeat view of the natural rate (meaning that the natural rate is perhaps close to 7.0 percent). That in turn would mean that the market should revise upward the mean of its distribution for interest rates. Note that the drop in the stock market is more consistent with a newly-bearish view of the natural rate than with a newly-bullish view of the economy.
I am not sure that Knut would want to go to the mat to defend that story, but what else has he got? I fall back to the view that financial markets moves are not really subject to interpretation in terms of macroeconomic models.
Dan Pallotta and Russ Roberts discuss it in a recent podcast. I have to admit that my views on Pallota have not changed. Nor have my views on non-profits vs. for-profits. Fabio Rojas had an argument in favor of non-profits.
the costs and risks of homeownership are almost never discussed by public agencies and that the benefits of homeownership as widely articulated are either hard to measure or are quickly refutable. I conclude that U.S. housing policies and government institutions designed to promote homeownership are deeply flawed. Serious discussion should occur at the highest levels about eliminating current policies and de-emphasizing homeownership as a policy objective.
See also my essay, Who Needs Home Ownership?
Here are two ways to characterize U.S. housing policy:
(a) it addresses a clear market failure in a reasonably cost-effective manner
(b) it is a collection of special-interest boondoggles
Is there anyone of any ideology persuasion who can make the case for (a) rather than for (b)?