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March 27, 2015

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Posted: 27 Mar 2015 12:06 AM PDT

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Posted: 26 Mar 2015 08:28 AM PDT

Very long travel day today, so just a few quick posts before heading to the airport. Will post more as I can.

Social Insurance Makes America More Entrepreneurial

Posted: 26 Mar 2015 08:28 AM PDT

I've made this point several times myself, i.e. that social insurance can promote entrepreneurship, but it's worth making again:

Welfare Makes America More Entrepreneurial: ... Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, "we must accept some amount of social dislocation in return for innovation." But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards.
Entrepreneurs are actually more likely than other Americans to receive public benefits, after accounting for income, as Harvard Business School's Gareth Olds has documented. And in many cases, expanding benefit programs helps spur new business creation. ...
Take food stamps. ... It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks.
Food stamps are not an isolated case. ...

The mechanism in each case is the same: publicly funded insurance lowers the risk of starting a business, since entrepreneurs needn't fear financial ruin. ...

'Fiscal policy Procyclicality and Output Forecast Errors: Bad Luck or Bad Decisions?'

Posted: 26 Mar 2015 08:28 AM PDT

Why do developing countries pursue destabilizing, procyclical fiscal policy? This is from Guillermo Vuletin and Leopoldo Avellan at Brookings:

Fiscal policy procyclicality and output forecast errors: Bad luck or bad decisions?: It is well-known that government spending has historically been procyclical in the developing world (Tornell and Lane, 1999; Kaminsky, Reinhart, and Vegh, 2004; Frankel, Vegh, and Vuletin, 2013).[1] Thus, government spending in these regions typically increases during periods of expansion and decreases during periods of recession. Unfortunately, this procyclical fiscal behavior reinforces output fluctuations, exacerbating booms and aggravating busts. Traditional explanations for this undesirable behavior have mostly revolved around the explicit or implicit notion that fiscal procyclicality is the deliberate result of political economy distortions and weak institutions (e.g., policymakers' short-sightedness and political pressure to spend when resources are available in good times, leaving few resources to spend in bad times).
Since the global financial crisis and, more recently, the sudden severe drop in commodity prices, important and frequent revisions in output growth forecasts around the world have become a new norm. This trend, in turn, has triggered heated debates in both policy and academic circles and the media about how governments should handle these frequent reassessments.
As a consequence of this debate, two strands of the fiscal procyclicality literature related to output forecast errors have been increasingly gaining support. While different in origin and nature, both strands put the emphasis (or even blame) on output forecast errors in determining fiscal procyclicality. These strands include:
1. Over-optimism in output forecasts (Frankel, 2011a; Frankel, 2011b; Frankel and Schreger, 2013). ...
2. Real-time data and misinformation literature (Forni and Momigliano, 2004; Golinelli and Momigliano, 2006 and 2008; Bernoth, Hughes Hallett, and Lewis, 2008; Cimadomo, 2012; Croushore and van Norden, 2013). ...
A recent paper by Avellan and Vuletin (2015) takes issue with these views and shows that, in fact, traditional political economy arguments and weak institutions help explain how governments handle unanticipated output fluctuations. ...

'The Confidence Witch'

Posted: 26 Mar 2015 08:28 AM PDT

Gloomy European Economist, Francesco Saraceno:

The Confidence Witch: ...The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed.
It is not shameful to change opinion. Rather the contrary, it is a sign of intellectual courage. Two years ago, the IMF famously surprised commentators worldwide with a rather substantial U-turn on the impact of austerity. Revised calculations on the size of multipliers led them to acknowledge that they had underestimated the impact of austerity on economic activity.
Even at that time it started with a technical paper. But significantly, that paper was coauthored by Olivier Blanchard, IMF Chief Economist. It then served as the basis for a progress report on Greece, in June 2013, that de facto disavowed the first bailout program arguing that austerity had proven to be self-defeating.
Let us just hope that in the ECB new building communication between the research department and the top guys is more effective than in the old one…

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