It was terms of trade, in the 1890s, with volatility

Nice review of J. Williamson's book "Trade and Poverty" in the new issue of the EJ.

While not exactly a ringing endorsement, the review made me want to read the book (which I probably should have already done.

Here's an excerpt:

Williamson's conclusions can be summarised as follows. First, the link between falling behind and globalisation is causal (p. 231). Second, changes in the external terms of trade matter much more for growth outcomes than most people recognise (p. 199) while the role of changing domestic fundamentals and, in particular, institutions has been exaggerated (p. 213). Third, if the goal was industrialisation and growth, the periphery needed smart tariff policies to foster skill-intensive sectors; in some countries, especially in Latin America, the politically driven policy response was, unfortunately, the wrong sort of protection (p. 229).

The rest of the review spells out why Williamson may be shortchanging the importance of institutions.

Hat tip to Justin S.

Why The World Needs Economists

Fact:  Productivity (output per person/hour) is much (MUCH) higher on smaller plots of land.* 

Resolved:  That this proves that "smallholders can feed the world."  More important, large farms are wasteful, and should be broken up.

Now, my good friend Marc Bellamare is no right wing, free market fundamentalist.  But he puts the hammer down on this argument.   In fact, he puts three different hammers down on it.  Bang, bang Bellamare's silver hammer made sure it was dead. 

The point is that even if you are a lefty, being trained in economics puts a pretty tight limit on how much stupid crap you can say.  We need more economists.

*This is a fact, unless it's measurement error.  Then it's not.

Party Competition and Economic Growth

Africa's (Dis)advantage: The Curse of Party Monopoly

Ann Harrison, Justin Yifu Lin & Colin Xu
NBER Working Paper, January 2013

Abstract:
Africa’s economic performance has been widely viewed with pessimism. In this paper, we use firm-level data for 89 countries to examine formal firm performance. Without controls, manufacturing African firms do not perform much worse than firms in other regions. But they do have structural problems, exhibiting much lower export intensity and investment rates. Once we control for geography and the political and business environment, formal African firms robustly lead in sales growth, total factor productivity levels and productivity growth. Africa’s conditional advantage is higher in low-tech than in high-tech manufacturing, and exists in manufacturing but not in services. While geography, infrastructure, and access to finance play an important role in explaining Africa’s disadvantage in firm performance, the key factor is party monopoly. The longer a single political party remains in power, the lower are firm productivity levels, growth rates, and sales growth for manufacturing. In contrast, the business environment and firm characteristics (except for foreign investment) do not matter as much. We also find evidence that the effects of the political and business environment are heterogeneous across sectors and firms of various levels of technology.

Nod to Kevin Lewis

The Fetish of Manufacturing

Great column by John Kay at the FT.

Teaser:

Physical labour incorporated in manufactured goods is a cheap commodity in a globalised world. But the skills and capabilities that turn that labour into products of extraordinary complexity and sophistication are not. The iPhone is a manufactured product, but its value to the user is as a crystallisation of services.

I guess he's just a "glass half full" kind of guy

David Leonhardt is frequently cogent, but his new piece "Who Gets Credit for the Recovery?" is risible.

I agree with his implicit premise: The economy is gonna do what the economy is gonna do and political involvement will mostly be credit-claiming or blame-avoidance, but after that we part company.

The biggest problem I see is the notion that anyone is giving out "credit" for the pathetic mess that is our "recovery". Yes, housing seems to turning a corner, but let's get real.

Fewer people have jobs now than did before the crash, even though 4 years have passed and the population has grown.

Housing starts remain well below pre-crash levels.

Real GDP growth so far is lower in 2012 than it was in 2011, and the 2011 figure is lower than the 2010 figure. And, given that we were emerging from a deep recession, the 2010 figure (2.4%) stunk!

Things are so bad that Democratic loyalists are celebrating a 2% growth rate in the 3rd quarter.

Things are so bad that it took a 9.6% increase in Federal government spending to get that dizzying 2% figure.

Behold: the world according to DL:

Income and Democracy

Income and democracy: Revisiting the evidence

Enrique Moral-Benito & Cristian Bartolucci
Economics Letters, December 2012, Pages 844–847

Abstract: In an influential paper, Acemoglu et al. (2008) find that the positive correlation between income per capita and the level of democracy across countries vanishes once country-specific effects are accounted for. In this paper, we find evidence of a non-linear effect from income to democracy even after controlling for country-specific effects. In particular, our findings point to the existence of a positive effect only in low-income countries.

Nod to Kevin Lewis

Petropolitics

The First Law of Petropolitics

Romain Wacziarg, Economica, October 2012, Pages 641–657

Abstract: We examine empirically the relationship between crude oil prices and the ebb and flow of democratic institutions, in order to test the hypothesis that high oil prices undermine democracy and sustain autocracy. We use a variety of time series and panel data methods over a wide range of country subsamples and time periods, finding strictly no evidence in favour of this so-called ‘First Law of Petropolitics’ (Thomas Friedman 2006).

Nod to Kevin Lewis
 

What went so wrong?

Ezra Klein wrote a nice piece yesterday arguing that the big problem in the recession was housing debt and the central failure of Obama's economic policy was ignoring this big problem.

Here's his synopsis:

The precise nature of the administration’s misunderstanding was that the key problem was household debt, and until that problem was solved the economy couldn’t recover. But while it had a clear strategy for attacking bad debt in the banking system, and a clear strategy for attacking the fall in consumer spending, it never had a clear strategy for reducing housing debt.

He then points out that there are really no politically viable solutions to "bad" housing debt.

And indeed, what occurred was the bursting of a massive bubble in housing that left us much poorer than we thought we were. And since houses are relatively non-liquid assets, and often the main savings vehicle for many households, that bursting has long lasting ill effects on the economy.

I agree that ex-post, it's a very hard problem to solve and stay in office. Ezra talks about the massive forgiveness paid by the taxpayer approach. The other extreme is the get tough, foreclose like crazy, put it all behind us ASAP approach. We muddled through somewhere in between, though closer to option II than option I.

The best policies here are ex-ante and preventative. Looking back, perhaps the Fed should not have kept rates so low for so long, setting off a desperate search for yield that engendered a massive demand on Wall St. for mortgages to repackage. Perhaps the rating agencies should not have granted AAA status to synthetic instruments that they did not understand. Perhaps regulators should not have turned a blind eye to the blatant level of fraud that was occurring in the mortgage market. When a whole category of loans is referred to as "liar loans", that might be a problem down the road.

And of course, none of these policy failures can be reasonably laid at President Obama's door, but as Ezra points out, they are a factor in this pitiful recovery which undoubtably will hurt Obama in November (I don't agree with Ezra that Obama has no other significant economic policy failures, but I'll save that for another post).

It was often said that the role of the Fed was to take away the punch bowl just as the party was getting started. That clearly did not happen, nor did any of the other regulatory agencies or politicians show any inclination to get the country to drink responsibly.

So here we are. What do we do?

Krugman and Eggertsson have a new paper arguing that in our current predicament (which they, like Ezra attribute to excessive private debt) more government borrowing and spending is a very effective policy tool.

As I see it, this path seems unlikely to be taken without a Democratic sweep of the election.

So here we are. What do we do, or stop doing? Tell me in the comments!

Catch me if you can

LeBron links to a study claiming the economic benefits of the single currency accrued mainly to Greece, Portugal & Spain.

I decided to look at the issue through the lens of real per-capita GDP via Angus Maddison's dataset and take a longer view than just the post-euro period.

Here's what I found (clic the pic for an even more wonkish image):

Ireland, Spain, Portugal and Greece were all growing fast relative to Germany (and France which is not on the graph) well before the introduction of the Euro. Ireland and Spain take off somewhere around 1990 and the intro of the Euro in 2000 does not speed up their trajectory. Portugal actually falls further behind Germany in the Euro era. Greece is the only country of these 5 whose catch-up to Germany accelerates with the intro of the Euro.

The data used can be found here.

It is also interesting to note that Greece, Portugal & Spain surged relative to Germany from 1960 - 1974, then stagnated till the end of the 1980s.

le deluge

Wow.  This totally sucks.  Really, really sucks.

Three sigmas.  We don't like three sigmas.

Escape velocity

We didn't reach it.

Revised numbers show GDP growth in the fourth quarter of 2011 was 4.1%, which fell to 2% in the first quarter of this year. Meanwhile the initial estimate of second quarter 2012 growth is 1.5%.

At least the rate of decline is slowing!

Even though I have eyes to see and ears to hear exactly how crappy a candidate Mittens is, it's hard for me to think Obama can win with an economy this bad.

That's a lot of Bi Bim Bop!

Kudos to Thomas Sargent for landing a two year position at Seoul National University for an estimated $1,250,000 per year.

Economists can pull down 7 figures in total compensation when you figure in consulting and speech-giving on top of the academic salary, but this is the biggest salary+"research funds" number that I'm aware of in economics.

Trickle down, baby. Trickle down.

Hat tip to Daniel Lin

but enough about you...

....let's talk about me!

Over at MR, folks are peppering LeBron with requests for posts.

One request that really struck me was, "What’s the most important economics question you ever asked?"

At a facile level, it's, "why are some nations so rich and others so poor?", but I can't claim any originality there as it was asked many, many times before I got there. I'm guessing the commenter meant an original question.

The next contender would be, "why do macroeconomists ignore politics?". Here I was a little less un-original, but several others were before me.

I guess the closest thing to an original economics question I've asked is, "if we want to study growth, why are we throwing away information by using cross-sectional averages instead of panels?"

p.s. if you have requests for posts from Mungo or me, please put them in the comments and we'll see what we can do. At least here, your odds of getting chosen are much much higher!

Sentence of the day

People it comes from Joe Stiglitz and it's a doozy:

"If my Cassandra forecast turns out to be wrong, stimulus can be cut."

The source is the FT, but I've already hit my quota there so here's a link from Mark Thoma.


Is he saying there already is stimulus in place now that we have the option of cutting?

Is he implicitly proposing some vague new conditional stimulus?

Is he an expert at putting toothpaste back into the tube?

If you put a stimulus in place and things started going well, wouldn't you shy away from cutting back on the announced stimulus for fear of mucking up the recovery?


UPDATE: this post was edited to remedy my severe lack of reading comprehension this morning. Thanks to Mark Thoma for setting me straight.

edging upward

The BEA announced an upward revision of real GDP growth in the fourth quarter of 2011 from 2.8% to 3.0%.

poco a poco

243,000 net new jobs in January (including 50,000 in manufacturing), November & December of 2011 figures revised up by 60,000, unemployment rate down to 8.3%. Details are here.

Not too shabby.

Net new jobs in the private sector were 257,000 so not only is employment rising but its composition is slowly shifting away from government and toward the private sector. In the last 12 months there has been a net job loss in the government sector of around 275,000 jobs

The net jobs figures for the last three months, after revisions, stand at 157,000 203,000 and now 243,000.

It will be interesting to see how the "austerity is killing us" people will spin this.

Is this what austerity looks like?

The graph above shows Federal spending (in blue) and State and Local spending (in red). The gray shaded area is the NBER's dating of the last recession. The numbers are NOT adjusted for inflation

Federal spending is still than 30% higher than it was in January of 2007. State and Local spending is still around 12% higher than it was in January 2007.

Is this really austerity?

Can government spending really never come down? Isn't it over 2 years since the end of the recession?

Aren't all the people talking about fiscal drag and government spending cuts slowing down the recovery just arguing from accounting identities like they yell at the right wingers for doing?

Can we really run a trillion dollar deficit and bemoan austerity simultaneously?

Not good

The advance estimate of real GDP growth for last quarter (2011 q4) is in at 2.8%. This is not so good in a number of ways.

First, "expectations" were for 3%.

Second, over half of the growth came from increased "inventory investment", i.e. the accumulation of unsold goods. 

Third, this number is subject to revision and the direction of revision is frequently downward.

Fourth, real GDP growth in 2011 was substantially lower than it was is 2010! 1.7% vs. 3.0%

Epic Fail!

Fifth, even if we discount points 1-4, 2.8% is a pitiful growth rate for a country coming out of a deep recession with a high unemployment rate and a depressed level of labor force participation.

President Obama should be thanking his deity every day for Mitt and Newt. They are the only reasons he's likely to win re-election with an economy this weak.

Krueger on Inequality

This would be Alan ("Nominal") Krueger, not Anne ("Real") Krueger. The problem is that Alan is not adjusted for infliction (of nonsense).

His screed on inequality and its causes.

The slides for the speech.

The topic is an important one. Dr. K's presentation of the problem are interesting. Not sure why he decided to go all simplistic on the "causes," tho. This is complicated.

(Nod to E-Chris)

If Your College Major Contains the Word "Studies," You are Part of the Problem!

"Far more than in Europe, most Americans remain instinctively loyal to the killer applications of Western ascendancy, from competition all the way through to the work ethic. They know the country has the right software. They just can’t understand why it’s running so damn slowly. What we need to do is to delete the viruses that have crept into our system: the anticompetitive quasi monopolies that blight everything from banking to public education; the politically correct pseudosciences and soft subjects that deflect good students away from hard science; the lobbyists who subvert the rule of law for the sake of the special interests they represent — to say nothing of our crazily dysfunctional system of health care, our overleveraged personal finances, and our newfound unemployment ethic. Then we need to download the updates that are running more successfully in other countries, from Finland to New Zealand, from Denmark to Hong Kong, from Singapore to Sweden. And finally we need to reboot our whole system. I refuse to accept that Western civilization is like some hopeless old version of Microsoft DOS, doomed to freeze, then crash. I still cling to the hope that the United States is the Mac to Europe’s PC, and that if one part of the West can successfully update and reboot itself, it’s America." [Niall Ferguson, Newsweek]

(Nod to Kevin Lewis)