Tyler Cowen's Blog, page 253

Assorted links

1. Six case studies of writers who changed their minds.  On what basis were they picked to contribute?  And when you like the writer but not the books.

2. Markets in everything: I want to be Brahms’s German Requiem.

3. Brad DeLong on Piketty.

4. Styrofoam essentialism.

5. The North Carolina experience with cutting unemployment benefits.

6. Leading economists endorse Christmas presents, sort of.  And Times Higher Ed best books list, deep and broad.

7. What is the deal on the new banking union?

Shiller on Trills

In this short piece, Robert Shiller explains one of the basic ideas of his work on macro markets:

The governments of the world should issue shares in their GDPs, securities that pay to investors as dividends a specified fraction of GDP, in perpetuity (or until the government buys them back on the open market). Governments need to end their historic reliance on debt financing: governments issuing shares in GDP is analogous to corporations issuing equity. My Canadian colleague Mark Kamstra and I propose issuing trillionth shares in GDP, and so to call these “Trills.” Last year, a U.S. Trill would have paid $15.09 in dividends, a Canadian Trill C$1.72. The dividends will change every year as GDP is announced, and predicting these changes will certainly interest investors, just as in the stock market. Governments can auction off Trills when current government debt comes due and needs to be refinanced, as part of a debt reduction program.

In this piece, Shiller focuses on the benefits of Trills as opposed to debt:

Substituting Trills for conventional debt helps deleverage the government, something whose importance has become very clear with the debt crisis in Europe.  The payments required of the government by the Trills is connected to the country’s ability to pay, measured by their GDP.

Trills could also be the foundation for many types of insurance products, for example, products that would pay off when GDP was down helping to alleviate business cycle issues. A market in Trills could also be used to make predictions and to judge policies (see Gurkaynak and Wolfers for an early test). Which policies will most increased the value of future trills? Similarly, by looking at how the market for trills changes as the Iowa Political Markets change we could identify which politicians are best for GDP (not just the equity and bond markets).

I featured Shiller’s work on macro markets in my book Entrepreneurial Economics: Bright Ideas from the Dismal Science. I think of this body of work as his most visionary and deserving of the Nobel.

Economic convergence between black immigrants and black natives

Alison Jane Rauh, a job candidate from the University of Chicago, has a new (job market) paper on this topic.  The abstract is full of information:

The number of black immigrants living in the US has increased 13-fold from 1970 to 2010, increasing their share of the black population from 1% to 10%. Black immigrants’ labor market outcomes surpass those of native blacks. This paper determines in how far the relative success of black immigrants is passed on to the second generation. While blacks of the second generation have equal or higher education and earnings levels than the first generation, the return on their unobservable characteristics is converging to that of native blacks. Race premia are put into a broader context by comparing them to Hispanics, Asians, and whites. Blacks are the only group that experiences a decrease in residual earnings when moving from the first to the second generation. Black immigrants do not only converge to native blacks across generations but also within a generation. For Asians and Hispanics, residual earnings decrease monotonically with age of immigration. For blacks, the residual earnings-age of immigration profile is upward sloping for those immigrating before the age of 15. Convergence across generations is mostly driven by low-educated second generation blacks that drop out the labor force in greater numbers than low-educated first generation immigrants do. Similarly, convergence within a generation is mostly driven by low-educated blacks who immigrate when they are young dropping out of the labor force in greater numbers than those who immigrate when they are older. A social interactions model with an assimilation parameter that varies by age of immigration helps explain this phenomenon. When making their labor force participation decision, immigrant men of all races, but not women, generally place more weight on the characteristics of natives the earlier they immigrate.

I take this to be a “peer effects are really really important” paper, namely that many of the virtues of immigrant culture are swallowed as the second generation assimilates.  I should note that the contents of this paper are interesting throughout, for instance: “Conditional and unconditional annual earnings of native black women are at 91% and 78% of white women, which points to a much more equal distribution than that of men (64% and 78%).”

Here is the abstract of another paper  (pdf) by Alison, entitled “Successful Black Immigrants Narrow Black-White Achievement Gaps”:

The number of black immigrants in the US quadrupled from 1980 to 2010, increasing their share of the black population from 4% to 10%. During that time period the black-white wage and employment gap widened substantially. This paper explores the extent native blacks differ from immigrant blacks. Additionally it determines in how far increased selective immigration masks an even greater deterioration in the economic condition of native blacks. In 2011, excluding black immigrants increases the white-black wage gap by 4% for men and 9% for women. It increases the employment gap by 13% and 19% for men and women respectively.

Here is the author’s home page.  I hope she gets a very good job.

Who disapproves of Obamacare?

I was somewhat surprised by these numbers:

Fifty-three percent of the uninsured disapprove of the law, the poll found, compared with 51 percent of those who have health coverage. A third of the uninsured say the law will help them personally, but about the same number think it will hurt them, with cost a leading concern.

I wonder if any of this poll was conducted in Spanish, and if not whether that would have changed the results.  I found this interesting too:

Of the uninsured who said they were not likely to sign up by the deadline, fully half said it was because of the high cost. Twenty-nine percent said they planned to go without coverage because they object to the government’s requiring it, and 11 percent said they did not need health insurance.

And this:

Seventy-seven percent of the uninsured said they disapproved of the mandate, compared with 65 percent of those who already have health insurance.

Chinese translation of *Modern Principles*

There is now a Chinese translation out of Modern Principles, our Principles text.

Information (in Chinese) on the macro text is here.  Information about the micro text is here.  You will note that China is a key example in our discussion of catch-up Solow growth, a topic neglected by many other leading Principles textbooks.

For basic information on the English language version of the book, see here.

Assorted links

1. What is scarce.

2. The dangers of barter with gingerbread biscuit tickets.  And Izabella Kaminska on shadow banking as free banking.

3. Clemens reviews Collier on immigration.

4. Will drones revolutionize agriculture?

5. A chat with Geoffrey Hill.

6. Pre-order the new Murakami book here, due out in August.

7. More excellent John Cochrane on the Nobel Laureates and finance.  And behavioral economics at the movies.

What predicts the differential impact of the taper?

There is a new paper by Eichengreen and Gupta (pdf):

In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets.  Different countries, however, were affected very differently. We use data for exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. We find that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country’s financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves and equity prices. We interpret this as investors being able to better rebalance their portfolios when the target country has a relatively large and liquid financial market.

You can think of this as a step in building a new theory of the non-neutrality of money.  The suggestion it seems is that liquidity begets further liquidity, a’ la Matthew.  Here is a related and non-gated FT post about “the fragile five.”

China moves against Bitcoin

China’s biggest Bitcoin exchange was forced to stop accepting renminbi deposits on Wednesday, sending the price of the virtual currency tumbling in one of its biggest markets globally.

You will find more here, and FT coverage here.  Since Tuesday, the price of Bitcoin in China has fallen more than thirty percent.  Here is my earlier post on China and Bitcoin., where I wrote “If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall.”  And here is Hal Varian on Bitcoin.

The politics of science fiction

Science fiction is an inherently political genre, in that any future or alternate history it imagines is a wish about How Things Should Be (even if it’s reflected darkly in a warning about how they might turn out). And How Things Should Be is the central question and struggle of politics. It is also, I’d argue, an inherently liberal genre (its many conservative practitioners notwithstanding), in that it sees the status quo as contingent, a historical accident, whereas conservatism holds it to be inevitable, natural, and therefore just. The meta-premise of all science fiction is that nothing can be taken for granted. That it’s still anybody’s ballgame.

That is from Tim Kreider, who praises the political visions and fiction of Kim Stanley Robinson.  Kreider also longs for a more political literature, devoted to such ideas as common stewardship of land and water, and also “small co-ops” instead of “vast, hierarchical, exploitative corporations.”  Among other changes.  He then writes:

My own bet would be that either your grandchildren are going to be living by some of these precepts, or else they won’t be living at all.

What is a good response to that?  Let’s look at the article itself, and we can see sentence which is smarter than Kreider himself seems to realize:

If historians or critics fifty years from now were to read most of our contemporary literary fiction, they might well infer that our main societal problems were issues with our parents, bad relationships, and death.

I would myself note that the politics of science fiction, on average (with exceptions), encourage us to think about “breaking a few eggs,” and not for the better.  The reality is that when it comes to the future, we can “see around the corner” only to a limited degree.  The upshot is that the rights of the individual — when applicable — should remain paramount, and no I don’t mean Caplanian libertarian rights.  You can only rarely be sure you will get such a great gain from violating rights, so why not do the right thing instead?  Science fiction inhabits the realm of fiction precisely because the building of grand scenarios is denied to us, for the most part.

To again use Kreider’s own words, societies where “nothing can be taken for granted” are exactly the ones I would never wish to visit, much less live in.  I know the radical anarcho-capitalist strand, but is there a Burke-Oakeshott-Hayek science fiction, in the traditionalist and conservative sense of that combination?  Or must we resort to the “fantasy” genre to capture such a vision?  What would a science fiction account of a macro-level spontaneous order look like?  Iain Banks?  Frank Herbert?

Does a warm climate discourage economic output?

Geoffrey Heal and Jisung Park have a new paper “Feeling the Heat: Temperature, Physiology & the Wealth of Nations,” here is the abstract:

Does temperature affect economic performance? Has temperature always affected social welfare through its impact on physical and cognitive function? While many studies have explored the indirect links between climate and welfare (e.g. agricultural yield, violent conflict, or sea-level rise), few address the possibility of direct impacts operating through human physiology. This paper presents a model of labor supply under thermal stress, building on a longstanding physiological literature linking thermal stress to health and task performance. A key prediction is that effective labor supply – defined as a composite of labor hours, task performance, and effort – is decreasing in temperature deviations from the biological optimum. We use country-level panel data on population-weighted average temperature and income (1950-2005), to illustrate the potential magnitude of the effect. Using a fixed effects estimation strategy, we find that hotter-than-average years are associated with lower output per capita for already hot countries and higher output per capita for cold countries: approximately 3%-4% in both directions. We then use household data on air conditioning and heating expenditures from the US to provide further evidence in support of a physiologically based causal mechanism. This more direct causal link between climate and social welfare has important implications for both the economics of climate change and comparative development.

The NBER version is here, I do not otherwise see ungated access.