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October 17, 2015

Latest Posts from Economist's View

Posted: 17 Oct 2015 12:33 AM PDT
Branko Milanovic:
Disarticulation goes North: ... In a recent piece published in the New York Times, Paul Theroux, after traveling through the American South, was shocked by the depth of poverty there, wrought in his opinion by the destruction of jobs that have all gone to Asia and import of cheap commodities from China. He was even more distraught by the apparent lack  of interest of American political and economic elites who seem to even fail to notice the plight of the Americans in states like Mississippi and most ironically in Arkansas where philanthropists such as the Clinton Foundation have not been much seen even as they proudly boast of  efforts "to save the elephants in Africa".  
The key issue raised by Theroux was whether trade, that is, globalization was responsible for this plight. The second issue that was raised was why there is so little empathy with the domestic poor or interest in doing something about their destitution. ...
One can safely claim, to the extent that these things that be causally proven, that the rapid worldwide progress in poverty alleviation is due to globalization. It is also true that on any income or consumption metric, poverty in parts of Africa is much worse than in Mississippi. But of course none of that may be politically or socially relevant because national populations seldom care about cosmopolitan welfare functions (where happiness of every individual in the world is equally valued).  They work with national welfare functions where a given level of destitution locally is given a much greater weight than the same destitution abroad. There are studies that show the revealed difference in implicit national vs. cosmopolitan weighting of poverty (the ratio for the US is estimated at 2000 to 1); there are arguments for this, going back to Aristotle who in Nicomachean ethics thought that our level of empathy diminishes as in concentric circles as we move further from a very narrow community. And there are also political  philosophy arguments (by Rawls) why co-citizens do care more for each other than for the others.
But I think that it is insufficient to leave this argument at a very abstract level where one group of Americans would have a more cosmopolitan welfare function and better perception of global benefits of trade and another would be more nativist and ignorant of economics. I do not think that the real difference between the two groups has to do with welfare concerns and economic literacy  but with their interests. Many rich Americans who like to point out to the benefits of globalization worldwide significantly benefited and continue to benefit from the type of globalization that has been unfolding during the past three decades. The numbers, showing their real income gains, are so well known that they need no repeating.  They are large beneficiaries from this type of globalization because of their ability to play off less well-paid and more docile labor from poorer countries against the often too expensive domestic labor. They also benefit through inflows of unskilled foreign labor that keep the costs of the services they consume low. Thus rich Americans are made better off by the key forces of globalization: migration, outsourcing, cheap imports, which have also been responsible for the major reduction of worldwide poverty.  Perhaps in a somewhat crude materialist fashion I think that their sudden interest in reducing worldwide poverty is just an ethical sugar-coating over their economic interests which are perfectly well served by globalization. Like every dominant class, or every beneficiary of an economic or political regime, they feel the need to situate their success within some larger whole and to explain that it is a by-product of a much grander betterment of human condition.
A new alliance, based on the coincidence of interests, is thus formed between some of the richest people in the world and poor people  of Africa, Asia and Latin America. Those who are left out in the cold are the domestic lower-middle and middle classes squeezed between the competition from foreign labor and indifference of national ruling classes. ...
The idea that globalization is a force that is good and beneficial for all is an illusion. Tectonic economic changes such as those brought by globalization always have winners and losers. (The first sentence of my forthcoming book "Global inequality", Harvard University Press, April 2016, says exactly that.) Even if globalization is, as I believe, a positive phenomenon overall, both economically ... and ethically because it allows for the creation of something akin to community of all humankind, it is, and will remain, a deeply contradictory and disruptive force that would leave, at times significant groups of people, worse off. Refusing to see that is possible only if one is blinded by ideology of universal harmonies or by own economic interests.
Posted: 17 Oct 2015 12:24 AM PDT
Rajiv Sethi:
Threats Perceived When There Are None: Sendhil Mullainathan is one of the most thoughtful people in the economics profession, but he has a recent piece in the New York Times with which I really must take issue.
Citing data on the racial breakdown of arrests and deaths at the hands of law enforcement officers, he argues that "eliminating the biases of all police officers would do little to materially reduce the total number of African-American killings." Here's his reasoning:
According to the F.B.I.'s Supplementary Homicide Report, 31.8 percent of people shot by the police were African-American, a proportion more than two and a half times the 13.2 percent of African-Americans in the general population... But this data does not prove that biased police officers are more likely to shoot blacks in any given encounter...
Every police encounter contains a risk: The officer might be poorly trained, might act with malice or simply make a mistake, and civilians might do something that is perceived as a threat. The omnipresence of guns exaggerates all these risks.
Such risks exist for people of any race — after all, many people killed by police officers were not black. But having more encounters with police officers, even with officers entirely free of racial bias, can create a greater risk of a fatal shooting.

Arrest data lets us measure this possibility. For the entire country, 28.9 percent of arrestees were African-American. This number is not very different from the 31.8 percent of police-shooting victims who were African-Americans. If police discrimination were a big factor in the actual killings, we would have expected a larger gap between the arrest rate and the police-killing rate.

This in turn suggests that removing police racial bias will have little effect on the killing rate.
A key assumption underlying this argument is that encounters involving genuine (as opposed to perceived) threats to officer safety arise with equal frequency across groups. To see why this is a questionable assumption, consider two types of encounters, which I will call safe and risky. A risky encounter is one in which the confronted individual poses a real threat to the officer; a safe encounter is one in which no such threat is present. But a safe encounter might well be perceived as risky, as the following example of a traffic stop for a seat belt violation in South Carolina vividly illustrates:
Sendhil is implicitly assuming that a white motorist who behaved in exactly the same manner as Levar Jones did in the above video would have been treated in precisely the same manner by the officer in question, or that the incident shown here is too rare to have an impact on the aggregate data. Neither hypothesis seems plausible to me.
How, then, can once account for the rough parity between arrest rates and the rate of shooting deaths at the hands of law enforcement? If officers frequently behave differently in encounters with black civilians, shouldn't one see a higher rate of killing per encounter? 
Not necessarily. To see why, think of the encounter involving Henry Louis Gates and Officer James Crowley back in 2009. This was a safe encounter as defined above, but may not have happened in the first place had Gates been white. If the very high incidence of encounters between police and black men is due, in part, to encounters that ought not to have occurred at all, then a disproportionate share of these will be safe, and one ought to expect fewer killings per encounter in the absence of bias. Observing parity would then be suggestive of bias, and eliminating bias would surely result in fewer killings.
In justifying the termination of the officer in the video above, the director of the South Carolina Department of Public Safety stated that he "reacted to a perceived threat where there was none." Fear is a powerful motivator, and even when there are strong incentives not to shoot, it is still a preferable option to being shot. This is why stand-you-ground laws have resulted in an increased incidence of homicide, despite narrowing the very definition of homicide to exclude certain killings. It is also why homicide is so volatile across time and space, and why staggering racial disparities in both victimization and offending persist.
None of this should detract from the other points made in Sendhil's piece. There are indeed deep structural problems underlying the high rate of encounters, and these need urgent policy attention. But a careful reading of the data does not support the claim that "removing police racial bias will have little effect on the killing rate." On the contrary, I expect that improved screening and better training, coupled with body and dashboard cameras, will result in fewer officers reacting to a perceived threat when there is none.
Posted: 17 Oct 2015 12:06 AM PDT
Posted: 16 Oct 2015 11:15 AM PDT
This surprised me. I was under the impression that things are moving in the opposite direction:
Economics and the Modern Economic Historian, by Ran Abramitzky, NBER Working Paper No. 21636, October 2015: Abstract I reflect on the role of modern economic history in economics. I document a substantial increase in the percentage of papers devoted to economic history in the top-5 economic journals over the last few decades. I discuss how the study of the past has contributed to economics by providing ground to test economic theory, improve economic policy, understand economic mechanisms, and answer big economic questions. Recent graduates in economic history appear to have roughly similar prospects to those of other economists in the economics job market. I speculate how the increase in availability of high quality micro level historical data, the decline in costs of digitizing data, and the use of computationally intensive methods to convert large-scale qualitative information into quantitative data might transform economic history in the future.
From the introduction to the paper:
... This sense that economists "believe history to be of small and diminishing interest" was made clear ... in 1976, when McCloskey wrote in defense of economic history a paper entitled "Does the past have useful economics?". McCloskey concluded that the average American economist answers "no". McCloskey showed a sharp decline in the publication of economic history papers in the top economic journals (AER, QJE, JPE). It was clear that "…this older generation of American economists did not persuade many of the younger that history is essential to economics." ...
Today, thirty years later, economic history is far from being marginalized and overlooked by economists. To be sure, economic history remains a small field within economics, but the average economist today would answer a "yes" to the question of whether the past has useful economics. Economists increasingly recognize that historical events shape current economic development, and that current modern economies were once upon a time developing and their experience might be relevant for current developing countries. Recent debates in the US and Europe about immigration policies renewed interest in historical migration episodes. Most notably, the Great Recession of 2007-08 reminded economists of the Great Depression and other historic financial crises. Macroeconomic historian Christina Romer, a Great Depression expert, became the chief advisor of president Obama.3 Indeed, Barry Eichengreen, himself an expert on financial crises in history, started his 2011 presidential address by saying that "this has been a good crisis for economic history."
 That economic history today is more respected and appreciated by the average economist is also reflected by an increase in economic history publications in the top-5 economic journals. The decline in economic history in the top-3 journals that McCloskey documented has been reversed...
Posted: 16 Oct 2015 09:51 AM PDT
Alan S. Blinder and Mark Zandi:
The Financial Crisis: Lessons for the Next One: The massive and multifaceted policy responses to the financial crisis and Great Recession -- ranging from traditional fiscal stimulus to tools that policymakers invented on the fly -- dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today's economy.
Without the policy responses of late 2008 and early 2009, we estimate that:
  • The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
  • The economy would have contracted for more than three years, more than twice as long as it did;
  • More than 17 million jobs would have been lost, about twice the actual number.
  • Unemployment would have peaked at just under 16%, rather than the actual 10%;
  • The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
  • Today's economy might be far weaker than it is -- with real GDP in the second quarter of 2015 about $800 billion lower than its actual level, 3.6 million fewer jobs, and unemployment at a still-dizzying 7.6%.
We estimate that, due to the fiscal and financial responses of policymakers (the latter of which includes the Federal Reserve), real GDP was 16.3% higher in 2011 than it would have been. Unemployment was almost seven percentage points lower that year than it would have been, with about 10 million more jobs.
To be sure, while some aspects of the policy responses worked splendidly, others fell far short of hopes. Many policy responses were controversial at the time and remain so in retrospect. Indeed, certain financial responses were deeply unpopular, like the bank bailouts in the Troubled Asset Relief Program (TARP). Nevertheless, these unpopular responses had a larger combined impact on growth and jobs than the fiscal interventions. All told, the policy responses -- the 2009 Recovery Act, financial interventions, Federal Reserve initiatives, auto rescue, and more -- were a resounding success.
Our findings have important implications for how policymakers should respond to the next financial crisis, which will inevitably occur at some point because crises are an inherent part of our financial system. As explained in greater detail in Section 5:
  • It is essential that policymakers employ "macroprudential tools" (oversight of financial markets) before the next financial crisis to avoid or minimize asset bubbles and the increased leverage that are the fodder of financial catastrophes.
  • When financial panics do come, regulators should be as consistent as possible in their responses to troubled financial institutions, ensuring that creditors know where their investments stand and thus don't run to dump them when good times give way to bad.
  • Policymakers should not respond to every financial event, but they should respond aggressively to potential crises -- and the greater the uncertainty, the more policymakers should err on the side of a bigger response.
  • Policymakers should recognize that the first step in fighting a crisis is to stabilize the financial system because without credit, the real economy will suffocate regardless of almost any other policy response.
  • To minimize moral hazard, bailouts of companies should be avoided. If they are unavoidable, shareholders should take whatever losses the market doles out and creditors should be heavily penalized. Furthermore, taxpayers should ultimately be made financially whole and better communication with the public should be considered an integral part of any bailout operation.
  • Because fiscal and monetary policy interactions are large, policymakers should use a "two-handed" approach (monetary and fiscal) to fight recessions -- and, if possible, they should select specific monetary and fiscal tools that reinforce each other.
  • Because conventional monetary policy -- e.g., lowering the overnight interest rate -- may be insufficient to forestall or cure a severe recession, policymakers should be open to supplementing conventional monetary policy with unconventional monetary policies, such as the Federal Reserve's quantitative easing (QE) program of large-scale financial asset purchases, especially once short-term nominal interest rates approach zero.
  • Discretionary fiscal policy, which has been a standard way to fight recessions since the Great Depression, remains an effective way to do so, and the size of the stimulus should be proportionate to the magnitude of the expected decline in economic activity.
  • Policymakers should not move fiscal policy from stimulus to austerity until the financial system is clearly stable and the economy is enjoying self-sustaining growth.
The worldwide financial crisis and global recession of 2007-2009 were the worst since the 1930s. With luck, we will not see their likes again for many decades. But we will see a variety of financial crises and recessions, and we should be better prepared for them than we were in 2007. That's why we examined the policy responses to this most recent crisis closely, and why we wrote this paper.
We provide details of the methods we used to generate the findings summarized above....

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