Why India should let engineers and doctors emigrate

One of the great frustrations of developing economies is that they spend scarce resources follow everyone's advice by educating their brightest citizens only to see them leave the country for greener pastures. And those pastures are mostly developed economies, where immigrants from the third world are often better educated than the locals. Is it still worth it to push higher education in developing economies?

Yes, would say Oded Stark and Roman Zakharenko. They base this on a simple two sector growth model. One sector, the "engineers," is productive to the point of exerting a positive externality on total factor productivity. The other, the "lawyers," does not. Workers can choose how much education to get and which career to pursue. Once you allow emigration, the general level of human capital increases, as the prospects of a foreign standard of living is a strong incentive to stay longer in school. The interesting part is that everyone is better off: engineers are better and lawyers are fewer. And such a result is not just abstract theory. I reported before on empirical examples of beneficial brain drain, for example in Fiji or Finland.

The corporate tax Laffer curve

Given the mobility of the headquarters of financial holding firms, there is much more diversity in corporate tax rates than tax competition would call for. Looking at OECD countries, the effective tax rate peaks at 40% in Japan and the US, while it is half this, or below, in other countries. Given the high mobility, would it be government revenue maximizing to reduce the tax rate in the US or Japan? In other words, are these two countries to the right of the Laffer curve peak?

Kazuki Hiraga asks this question for Japan, but in a closed economy, thus ignoring international tax competition. Japan is still on the wrong side of the corporate tax Laffer curve. Decreasing the tax not only increases tax revenue, it leads to more growth through stronger capital accumulation. Add tax competition, and you have even better reasons to cut the corporate tax rate. Hence, the argument likely also applies to the US.

But wait a moment, let us have a look at the model. It is a standard real business cycle model with various distortionary taxes. The collected revenue is rebated in lump-sum fashion to households, which own the firms. In other words, this is a model where taxes a never optimal. Indeed, nothing useful is done with tax revenue, and there is no redistribution going on. No need for fancy solution techniques to understand the results...

On the ineffectiveness of a fiscal stimulus

When is a fiscal stimulus going to work? If you listen to economists these days, it would be difficult to know. One reason is that protagonists quickly become sidetracked by the associated political discourse. The other is that one would first need to define the fiscal stimulus. Depending on whether it is provided by tax rebates, public expenses or tax delays makes a big difference. Also, who is targeted matters a lot. Thus one needs to get the specifics of the fiscal stimulus to give a proper answer. The general rule, though, is that a fiscal stimulus works best if the credit or liquidity constraint households obtain additional cash. They are going to spend it right away. The other households would reduce consumption only slightly in anticipation of future increased taxes due to a wealth effect. In the aggregate, consumption would then go up, but not a lot. But there can be other circumstances where it would work better.

Thorsten Drautzburg and Harald Uhlig study a situation similar to the one now in the Unites States: nominal interest rates getting very close to zero. Then, they claim the fiscal multipliers are still rather small, but may be positive despite distortionary taxation. Now contrast this with the results of Lawrence Christiano, Martin Eichebaum and Sergio Rebelo, who argue that the fiscal multipliers become very large (and positive) when nominal interest rates are close to zero. Who is to believe? Both use a rather elaborate DSGE model, in both cases estimated. Both use the Calvo fairy. Or a Taylor rule. The first has financial frictions, while the second has investment adjustment costs, which should come to the same. If anybody can figure out why the results are so different, I would appreciate it.

It particular it would be interesting to understand why now would now be the wrong time to institute an austerity regime. To me, it would even make perfect business sense: why not build infrastructure when the cost in terms of financing and labor are low? Keep in mind that every unemployed worker that is hired does not need unemployment benefits...

Male circumcision and risky sexual behavior

There is a well-known phenomenon that states that when an activity becomes safer, people will respond with riskier behavior. The classic example is the use of seat belts that has lead to more aggressive driving (although there is a claim that this example is wrong). Now switch to another risky behavior: sex. It is well established that male circumcision leads to a significantly lower transmission probability of AIDS. Is risk compensation also happening here?

Nicholas Wilson, Wentao Xiong and Christine Mattson look at recently circumcised males in a region of Kenya and find that their sex behavior is less risky than the uncircumcised control group. This is not a selection effect, as circumcision has been randomly assigned. The authors think that the circumcised ones have become less fatalist about future life prospects and thus changed their behavior for the better (this is also why you want to provide health insurance conditional on not dying from AIDS). I wonder though whether the circumcision has made them more aware of the risk of AIDS as well.

Athletes are more competitive, but also more destructively envious

Student athletes are better than average students, despite having some sports severely dragging down this record. My impression is that these students know that they have less time to study and thus do not fool around like the others. They develop superior time management skills and thus obtain better results with less time to study.

Another aspect I did not think about is that athlete are more competitive. It is in part selected and in part learned: they get into sports because they are competitive, and they become competitive because they are athletes. Jérémy Celse shows that this is a mixed blessing, though. Once they have graduated, they also get an edge from being competitive and used to compete. However, athletes are less cooperative and find satisfaction in hurting others. Using an experimental approach, Celse finds that (self-declared) athletes behave anti-socially and with more jealousy than others when learning they did worse than their experiment partners (or opponents). In other words, do not count on athletes to be team workers. It is unclear whether this applies also for those practicing team sports. The variable was captured, but I see no result using it.

Are government workers more motivated?

In times if tight fiscal conditions, it is easy to criticize public employees. Civil servant have the reputation of being overpaid, underworked, lazy, unmotivated and enjoying too many benefits. I will not address all of this concerns here. I already covered overpaid, let us talk about unmotivated.

Using the World Values Survey, Sarah Smith and Edd Cowley find that public sector workers are intrinsically more motivated. To some extend this is not surprising, as one self-selects into the public sector when one is not that motivated by profits and money, but rather what public service stands for: serving others. But this does not apply to every country. The more corruption there is, the less motivated are civil servants. Indeed, in a corrupt government, public service takes a back seat to earning more money (or influence). How can one the explain the bad rap civil servants gets from private sector workers in the least corrupt economies? Maybe it is the public just reflecting its own values about work on the public workers, unjustifiably.

More on the long term consequence of slavery in Africa

Since the start of this blog, one of the most popular posts has been one that analyzes the long-term costs of slavery in Africa. Of course, it is about the consequences in regions where slaves were taken from. There is also a region where they have been taken to, that is South Africa. What has been the impact there?

Johan Fourie writes that farmers taking slaves prospered thanks to economies of scale of specialization, to the point that they were considered by some to be the richest in the world at the time. But this advantage did not last long, as the use of slave labor discouraged further immigration from Europe. And as education opportunities were limited to (free) whites, large inequalities were maintained through a period where human capital became more important. These inequalities and the large fraction of poorly educated citizens, even after emancipation and the end of apartheid, stills drags the South African economy down, because institutions emerged to perpetuate these inequities.

This persistent impact of inequality in human capital is consistent with evidence from the US, as I reported in a previous post, with a recent update by the same authors just published recently. Graziella Bertocchi and Arcangelo Dimico expand on their use of US panel data. In short, they find that the education gap between whites and blacks at the county level today is determined by the initial gap in 1940, with only little convergence since. And the initial gap is largely explained by prevalence of slavery in earlier years.

On the superiority of secularism

The US presidential election season in upon us, and of course religion will again be a major factor. While this is rather unique in the Western world that the religion of a candidate would matter, this fact seems very natural to Americans. The basic logic is that a god-fearing politician is less likely to abuse his power, especially in the position of president, where he cannot vie for a better position through exemplary behavior. That seems to be a slam-dunk for religious candidates, yet experience from the rest of the Western world seems to contradict this. In fact in many other countries, overtly religious candidates are suspected of having allegiances primarily with the religion, not the country.

Pavel Ciaian, Jan Pokrivcak and d'Artis Kancs go one step further and try to compare developed economies, that generally rely on secular institutions to enforce laws and rules, to developing economies, that more frequently draw on informal institutions, in particular religious ones. They find that religion-based institutions are weaker because thy hinge on credibility which is difficult to build and easily lost. Secular ones have an explicit and formal legal enforcement mechanism that can also adapt to changing circumstances. The latter means also that religious enforcement systems are best for static societies, while dynamic and growing economies should adopt secular systems. I am not quite sure causality goes this way, but correlations certainly support this.

Recessions are costly

Robert Lucas has pushed the idea that business cycles are not that costly that they would need intervention, and the real business cycle literature, at least the early one, has anyway advocated that the government should stay out of this kind of business. It is true that long term growth and understanding why some countries are so poor are more important questions, yet one cannot shake the feeling that recessions are costly. The recent one is more severe than usual and can highlight how its costs can be high, and those costs may persist for some time if the much longer than usual unemployment durations translate into significant losses in human capital and ultimately wages.

Steve Davis and Till von Wachter provide some new evidence of a somewhat different kind. Studying US workers displaced in mass-layoffs, they calculate the present value of a job loss in terms of pre-loss wage years. When the unemployment rate is below 6 percent, the loss is of 1.4 years. Above six percent, as is typical in a recession, the loss is 2.8 years, i.e., much much more than the increase in unemployment duration. One can only imagine that these numbers are going to be much worse for the last recession. And keep in mind that these higher numbers apply to more people in a recession. And it matters in aggregate: if the unemployment rate goes from 5 to 10%, it means 5% of the population loses 1.4 additional years of wages. That is 0.7% of national labor income, or 0.5% of GDP. Not peanuts, and I have not even factored in anything about curvature in utility.

Why the young demand more social insurance than older generations

Take up rates for various social insurance schemes generally increase from generation to generation, even when their is no change to the rules. That must be either because new generations are more feeble and, say, tend to become more frequently or earlier handicapped, or that they have a higher demand for social insurance benefits, say, because they are feeling more entitled (one can have different interpretations).

Martin Ljunge build a model where younger generations are influenced by what older generations did in the following way: Deciding whether to apply for benefits depends on a "psychic cost" that depends on the take up rate of the previous cohort. The model is the estimated using individual data from the sick leave program in Sweden (I think, this is never explicitly mentioned). It is found that, indeed, having parents taking advantage of social benefits lowers the cost on one doing so oneself. This effect makes up half of the long term increase in the take up rate.

Precaution versus prudence

Why do people accumulate precautionary savings. Conventional wisdom tells us this happens because people face some shocks to income and they are averse to risk and prudent. Now, we need to be careful here. Risk aversion means that one does not like fluctuations in utility (say, from consumption). Prudence means that one dislikes bad outcomes. Hence they do not mean exactly the same thing, and one could conceive precautionary savings without prudence.

Agustín Roitman shows an example where this works. To do this, he uses a new class of preferences that allows to distinguish clearly risk-aversion and prudence: ac_t - bc_t³ (it may not be easily visible, this is linear consumption less cubed consumption with some coefficients). It has a relative coefficient of prudence of -1 (ratio of third to second derivative), which is constant and independent of risk aversion. The negative value also means this economic agent is imprudent. As Roitman shows, this agent will still accumulate precautionary savings, hence prudence is not necessary. And except for these assumptions on the utility function, the results holds quite generally.

Malthus visits Rwanda

Rwanda has always struck me as the perfect example of a Malthusian economy. A dense population where land is systematically divided up among descendants, leading to tiny lots that are barely sufficient for survival.Lots are so small that new capital for its exploitation is not relevant, and no technological improvements have any significant bite. In the end the land can only support a population at the edge of famine.

Marijke Verpoorten brings an intriguing connection between the Malthusian theory as applied to Rwanda and the genocide of 1994. Using regional data, she finds that the areas where there was the most urgent population pressure (through density or growth) were also the ones with the most killings. In a way, society was taking care of a business nature and famine could have.

On the mobility of academics in Europe

Europe has suffered a brain drain of top academic scientists that it has tried to reverse by offering better work conditions. The main competitor in the United States, where top scientists are able to attract easy funding and universities are accommodating. While pertains to relatively few people, they are considered to be key, as their reputation can attract better colleagues and graduate students, ultimately improving the rankings administrators vie for. Given the large amounts of money spent by the European Commission and its country counterparts, it is important to understand what motivates scientists to move.

Edward Bergman does this using a survey of 1800 European academics considered to be among in the top institutions. Those who exhibit higher levels of loyalty or "voice" (opinionated on local affairs) tend to stay and try to improve things internally , if necessary. The others prefer to leave when local conditions worsen, and then they have no particular loyalty to stay in Europe when they are just looking for better working conditions. All this is not too surprising. What I find more interesting is that scientists top priority is research opportunities followed by salary, and language preferences is very minor. European universities cannot count on scientists coming home any more.

The surprisingly low border effect of the BigMac

The Economist's BigMac Index is widely used as an indicator of purchasing power parity. I have never been convinced that it is an appropriate indicator, though. But studies keep using it, and teachers keep mentioning it.

The latest is Anthony Landry who uses it to study the border effect, i.e., how a border adds to the cost of transportation. That assumes that BicMacs are all produced in one location and then shipped to all stores worldwide. This clearly is not the case, both for the raw material and for the assembly. While the raw material is produced centrally in each country, it is only rarely passing a border due to regulation and preferences for local product. I thus do not see the point of estimating borders effects with BigMacs.

The recent collapse in the trade of durable goods

One important feature of the recent crisis has been a significant drop in international trade. There is nothing surprising in this, as it is a regular feature of recessions that imports decrease more than GDP, as they are mostly composed of intermediate and investment goods. And it is well known that investment is very volatile through the business cycle. This are all well-known facts, that are easy to replicate with standard international business cycle models.

Dimitra Petropoulou and Kwok Tong Soo look at this trade drop from the perspective of trade theorists. They use a small open economy model (hence prices are exogenous) with two-period overlapping generations (hence we are talking about long-term movements, not business cycles) with tradable durable goods and a non-tradable non-durable good. There is a fix endowment of labor and capital that can freely be allocated between sectors (hence there is no investment, or savings). Agents can freely borrow and lend within a generation, but not between generations or with abroad.

Why do I mention this? Because Petropoulou and Soo try to reinvent the wheel and make it square. There is a large international business cycle literature that has gone through all this with much more realistic assumption and delivered quantitative results. And this not the first time I see that trade theorists could learn a lot by reading a little bit outside their bubble.