New Economist

'You can't beat something with nothing'

Frustrated conservative gadfly Irwin Stelzer laments the lack of Tory economic policy and offers some prognostications about the future shape of British tax policy in today's Telegraph: To beat Brown the Tories need an economic policy that adds up

'You can't beat something with nothing' is one of the oldest clichés in politics. And Gordon Brown is surely something – intelligent, dedicated, experienced, and a man with an economic record that has survived debunking by his critics. Yet the Tories are planning to unseat him with – nothing.

Consider their cast. David Cameron, likeable enough, with a shrewd sense of image-creation, who burst on the political scene with an opportunity to put policy flesh on the skin and bones of his natural, Reaganesque optimism.

Give him this: he has succeeded in getting the Tories listened to. Oliver Letwin, who once believed that tax cuts were an important part of any effort to wrest some power from the state and return it to individuals.

Give him this: he has parlayed his U-turn on tax cuts into a return to the Tory top table. And George Osborne, who says he is persuaded that tax cuts are the enemy of "economic stability".

So as Gordon Brown prepares a tax programme as the centrepiece of his coherent view of Britain 2020, the Tories chuckle about how they plan to beat this old, dour, unfashionable politician with – nothing. Or at least nothing by way of policy. Forget Cameron – his job is to create heart-warming photo ops, and he is good at it. Forget Letwin – his job is to convert the suggestions of some dozen or so groups into a manifesto.

Politics and fiscal decentralisation

Does fiscal decentralisation lead to more efficient governance, better public goods, and higher economic growth? Decentralization and Political Institutions (PDF) by Ruben Enikolopov and Ekaterina Zhuravskaya tests Riker’s 1964 theory that the results of fiscal decentralisation depend on the level of countries’ political centralisation:

We analyze cross-section and panel data from up to 75 developing and transition countries for 25 years. Two of Riker’s predictions about the role of political institutions in disciplining fiscally-autonomous local politicians are confirmed by the data. 1) Strength of national political parties significantly improves outcomes of fiscal decentralization such as economic growth, quality of government, and public goods provision. 2) In contrast, administrative subordination (i.e., appointing local politicians rather than electing them) does not improve the results of fiscal decentralization.

So yes, political institutions do play an important role in determining the results of fiscal decentralisation. The authors conclude:

Therefore, a remedy to poor governance in large inherently decentralized countries is building strong national political parties whenever possible. Strong parties help to provide elected local officials with efficient political incentives, because their chances of  election depend both on national party support and the satisfaction of the local constituency. This allows the striking of a balance between national objectives and local accountability.

How are wages set in Beijing?

That is the question asked by José de Sousa and Sandra Poncet from the Université Paris 1, in a new working paper. Drawing on a sample of 29 Chinese provinces between 1995 and 2002, How are wages set in Beijing? (PDF) finds that most of the variance in the average regional wage rate is due to differences in access to markets and to immigrant labor.

Both market access and migration have statistically significant effects on the wage level. The magnitude of the immigrant labor access offsets the impact of market access and exerts a downward pressure on wages.

Taylor rules

I should have guessed it. IDEAS list of the most popular economic citations, weighted by recursive impact factors, is John B. Taylor's classic 1993 paper "Discretion versus policy rules in practice"; published in the Carnegie-Rochester Conference Series on Public Policy, volume 39, pages 195-214, December.

If one uses the unweighted number of citations, then the Taylor paper comes second after Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, volume 107(2), May.

Either way, no arguments from me.

Germany: Outsourcing and job security

Another paper from last week's conference on The Impact of International Competition on Firms and Workers was by Ingo Geishecker from Freie Universität, Berlin. Using a large panel of individual monthly employment spell data from German manufacturing, he finds that international outsourcing, when narrowly defined, has "a marked impact on individual employment security". Here is the abstract for The Impact of International Outsourcing on Individual Employment Security: A Micro-Level Analysis (PDF):

The paper analyzes how international outsourcing affected individual employment security in German manufacturing industri es between 1991 and 2000. The analysis is carried out at the micro-level, combining monthly spell data from the German Socio-Economic Panel and industry-level outsourcing measures. By utilizing micro-level data, problems such as aggregation and potential endogeneity bias, as well as crude skill approximations that regularly hamper industry level displacement studies, can be reduced considerably.

The main finding is that international outsourcing significantly lowers individual employment security. Interestingly, the effect does not differ between high-, medium-, and low-skilled workers. With regard to the observed skill upgrading and high relative unemployment rate of low-skilled workers in Germany the impact of international outsourcing is therefore not related to skill biased displacement but to reduced chances for reentering employment.

Understanding manufacturing decline and its challenges

Why has manufacturing been in decline across Western economies, and what challenges does this pose for governments? A recent OECD paper by Dirk Pilat and colleagues examines this trend, and possible causes: The Changing Nature of Manufacturing in OECD Economies (PDF), STI Working Paper 2006/9.

The study confirms that the share of the manufacturing sector in total economic activity continues to decline in OECD countries, and expects it "is likely to do so in the future". Manufacturing production has become "more and more integrated at the global level". These findings are hardly surprising; more interesting is that the character of manufacturing production is also changing:

The distinction between high-technology and low-technology sectors is becoming less relevant, as certain components of high-technology production can also be carried out in non-OECD countries. Manufacturing activity in OECD countries increasingly incorporates high-value added services. This change seems due to business models that increasingly emphasise intellectual assets and high-value added activities (OECD, 2006), such as research and development, financial and aftersales services, instead of manufacturing production as such. The distinction between manufacturing and services is blurring, complicating empirical analysis with data by economic activity.

The authors also find that: (1) productivity growth in manufacturing remains high in many OECD countries, (2) the manufacturing sector still accounts for the bulk of spending on research and development, and (3) innovation in manufacturing remains dominated by OECD countries. Doomsayers take note! On innovation, the paper finds:

The emphasis on high value added activities translates in a growing importance of innovation. Research and development in non-OECD countries is growing, notably in China. Thus far, growth of R&D in non-OECD countries has not translated into much new innovation, as measured by triadic patents. OECD countries continue to account for the bulk of global patenting activity. That being said, the R&D intensity of OECD countries has not grown significantly in recent years, even if there appears to be a growing emphasis on innovation in national policies.

The paper concludes that these trends in manufacturing pose two challenges for policy makers. First, how to how to retain a viable manufacturing sector in OECD countries. Second, how to handle the impact of the structural shift from manufacturing to services (displaced workers, for example). Comments welcome.

France: Unions, jobs and outsourcing

This week I will be citing a few recent papers on outsourcing. The first, by senior INSEE researcher Francis Kramarz, examines the French experience. The paper shows that French unions who flex their muscles in the face of greater trade competition make things worse, by encouraging firms to oursource more jobs. Here is the abstract for Outsourcing, Unions, and Wages: Evidence from data matching imports, firms, and workers (PDF), delivered at the University of Nottingham's recent conference on The Impact of International Competition on Firms and Workers:

How are wages and employment of manufacturing workers affected by trade competition? In particular, how are wages and employment affected by the sourcing strategies of their employing firm and those of their competitors? What is the role of unions in this process? I attempt to answer these questions using unique French data that matches firm-level information on imports, value-added, employment, firm-level data on unions and negotiations, with individual worker data; at a unique moment - the first years of implementation of the Single Market Program (SMP) within the European Community.

A simple bargaining model, particularly well-suited to the French institutional setup, allows me to capture the mechanisms by which changes in competition can directly affect wages: changes in the firm's ability to pay (as measured by the quasi-rent, the total pie shared between the workers and the firm) as well as changes in trade competition and sourcing strategies that potentially affect the bargaining process by altering both the firm's and the workers' threat points. I use an IV strategy where export prices of American firms act as instruments for trade competition and outsourcing. First, trade competition affected the size of the quasi-rents, most particularly in large firms where these rents were large. Because workers received in average 20% of the quasi-rent but also because wages declined with competitive pressure induced outsourcing, trade competition has negatively impacted wages.

To see how unions potentially entered the process, I re- examine my results when information on firm-level negotiations between firms and unions is added. As expected, in firms with strong unions (those able to impose bargaining on both employment and wages) workers were able to capture a large share of the declining quasi-rent (about 50%). However, the presence of strong unions has apparently led these, mostly large, firms to increase outsourcing with an associated decline in employment. As a result, unions' fight for workers' wages and employment appears to have backfired.

New book: 'Inside the Economist's Mind'

Published earlier this week, Inside the Economist's Mind: Conversations with Eminent Economists has all the hallmarks of an economic bestseller. The book is published by Blackwell and edited by Paul Samuelson and William Barnett. There is even a book weblog, maintained by Barnett.

Interviews were conducted with (in alphabetical order) Robert Aumann, David Cass, Jacques Drèze, Martin Feldstein, Stanley Fischer, Milton Friedman, János Kornai, Wassily Leontief, Robert E. Lucas, Jr., Franco Modigliani, Paul A. Samuelson, Robert J. Shiller, Christopher A. Sims, Paul A. Volcker, Thomas J. Sargent and James Tobin. That's quite a cast!

In his introduction, Samuelson bemoans the near disappearance of economic history in graduate economics:

When a discipline—economics, chemistry, or acupuncture—is in a dynamic stage of rapid growth, its up-front cyclists care little whether it was Newton or Leibniz who “invented” the calculus. The economics profession is in such a dynamic stage of rapid growth, as made clear by the interviews in this book. The book permits us to step back and view the whole of the field in a revealing context that otherwise is easily missed in the narrow focus of individual expert researchers.

...This helps explain the historical fact that the role in the graduate curriculum once played by “History of Economic Thought” has eroded down to a narrow cadre of learned experts. An unearned snobbery ensues, as is well illustrated by Bernard Shaw’s canard: “Those who can, do. Those who can’t, teach.” Good history of science deserves a non-zero weight in the university curriculum. The dynamic growth in individual subfields of the economics profession needs to be supplemented by overviews of the whole, not just as the sum of its normally separated parts. This book provides such a view of the whole of the modern field of economics and the connection of that whole with the life experiences of famous economists whose work was seminal to the field.

This book won’t fill that gap. But it's a good place to start.

UPDATE: This post has sparked a lively debate in the comments below. William Barnet himself offers these intriguing comments:

This exchange is productive and very interesting.  But I'd like to point out to those who may not yet have seen Inside the Economist's Mind that what it contains is much more than history of thought.  From the time that I began this project about 10 years ago, what I did was to arrange with the two publishers involved (Cambridge U. Press and Blackwell) that interviews be viewed as quotations and thereby not subject to any kinds of copy editing or refereeing by referees, editors, or publishers.  In usual peer reviewed publications, even the most famous Nobel Laureates do not have the freedom to say whatever they want without required revisions (i.e., censorship). 

This book's conversations, from their first publication in the CUP journal that I edit, to their current appearance in this Blackwell book, have permitted eminent economists to "let loose."  It became difficult to maintain that degree of freedom, when one of the participants (David Cass at the U. of Penn.) used the four letter f--- word to refer to a former dean by name.  But I stuck to my original commitment and made that commitment known to all participants, including the great Paul Samuelson.  As a result, in this book you will find revelations that will astonish you about such topics as economics, politics, governments, religion, oppression, assassinations, discrimination, wars, kings, presidents, the stock market, communism, fascism, and globalization, and often from first hand sources. 

I was myself amazed by what came out in these conversations, when the participants recognized that they could say anything.  Although the book can be ordered from Blackwell, the book will not be widely available in bookstores until December.  You will find statements in that book that could motivate astonished bloggers for months.

So order the book, and be prepared to be astonished.

Human Development Report 2006

The UNDA has just published the 2006 Human Development Report. The full report is available online, with this year's issue focussing on 'the global water crisis'.

The latest Human Development Index, which analyses 2004 statistics from 175 UN member countries, is published in the report. It once again ranks the Nordic and Anglo-saxon economies highly, accounting for seven of the top ten: 

1. Norway
2. Iceland
3. Australia
4. Ireland
5. Sweden
6. Canada
7. Japan
8. United States
9. Switzerland
10. Netherlands

Finland, for once, didn't come first - it ranked 11th. The United States moved up from tenth to eighth place. The UK was 18th, down from 15 in 2005 "because of a change in how education statistics are reported". The press release notes:

After a costly setback in human development in the first half of the 1990s, Central and Eastern Europe and the Commonwealth of Independent States (CIS) have recovered strongly, and progress since 1990 in East and South Asia continues to accelerate. But  sub-Saharan Africa shows no sign of improving, principally because of the devastating effect of HIV/AIDS on life expectancy.

Blanchard on current accounts

MIT's Olivier Blanchard presents his views on current account deficits later this week in the annual Mundell-Fleming lecture, at the IMF Seventh Jacques Polak Annual Research Conference in Washington, DC. This year the theme is capital flows, and Blanchard's papers is on Current Account Deficits in Rich Countries (PDF).

In this lecture he takes "a step back from current policy debates" and looks at "the case for policy intervention in the face of large current account deficits in rich countries." While "reducing these distortions ..is clearly desirable", he argues that the focus for policy should be on the distortions and "not the reduction of current account deficits per se." Blanchard concludes on this note:

If such measures were taken, existing simulations by the Fed and by the IMF suggest that imbalances will indeed be reduced, but will still remain large. The question is then whether more should be done. This is where this lecture is most relevant. The answer is maybe not, unless and until we have a good understanding of remaining distortions, and how they justify further policy intervention.