Why should we debate the contributions of particular dead economists?

Pier Luigi Porta reports that there is currently a lively debate on the legacy of Piero Sraffa's research and its contribution to modern economics, all this in conjunction with the opening of Sraffa's archives twenty years ago. Sraffa's major work was published half a century ago, and it influence economic thinking back then. But Economics moved on, we found new techniques, models and evidence. What is the purpose of going back to outdated theories? I realize that sometimes you need to take a few steps back when you realize you got into a dead-end, but that does not mean one should worship old science and look for its traces everywhere.

There are, however, circumstances where the history of economic thought is useful. For example, there certainly are some fads in economic research and it would be useful to learn how they emerge. Fads are a waste of time and should be prevented. It can also be useful to understand how some people can lead economic thinking onto a particular path, especially when there are some self-interests attached (and the path turns out to be a dead-end). But this is more about group psychology than hero worship.

Maybe someone can help me understanding why we need this debate about the importance of Sraffa in current economic thinking. I do not see it.

Why is financial education unpopular?

People make dumb financial choices often because they miss some of the most elementary notions of finance, and they even realize that. Yet, it is extremely difficult to get them to sit down and learn something about elementary finance? Why? Is it because their is a stigma? Because it is horribly boring? Because they have better things to do? Because they do not see the point of it?

Miriam Bruhn, Gabriel Lara Ibarra and David McKenzie tried to coax people into a financial education class in Mexico and found it very difficult. They tried with substantial monetary incentives and still achieved little. Even more disheartening, those they managed to get through the door retained very little: they saved more, but only for a little time, and their borrowing effort was unaffected. Sad.

I wonder whether there is comparable data for developed economies that were recently rattled by the financial crisis. People must have realized that financial education matters. Did they improve their financial literacy? Give me some hope.

How much do firms want to stay informal?

In developing economies, a substantial fraction of the economy stays informal, that is, unregulated, untaxed and unprotected. Why so? One could argue that they want to avoid red tape and corruption. Or they may find the the benefits of formality, like better access to credit or payment systems, courts and insurance, do not outweigh the costs being visible to the state, like workplace regulation, taxes and competition with untaxed businesses.

Suresh de Mel, David McKenzie and Christopher Woodruff perform an experiment in Sri Lanka wherein firms are offered various incentives to formalize, from simple administrative help to lump-sum payments corresponding to two months of profits. Helping with the red tape does not change much, however payments got up to half of the firms to formalize. The threshold to formalization seems rather low in monetary terms, and may also include some path-dependence. From post-experiment interviews with participating firms, the authors learned that the formal firms not change their profits much, but owners felt more legitimacy and they report more confidence in the state. Thus, they are unlikely to return to informality. And if this were to happen at a greater scale, I surmise this would have importance scale effects in formalization, as formal businesses would fear less informal competition. Formalizing an economy may thus be relatively cheap to achieve.

Euro zone: the common cycle is strong

The general thinking is that if you want to create a monetary union, a strong prerequisite is that the business cycles in the involved economies should be well synchronized, among other criteria. The reason is obvious: it allows consensus regarding monetary policy. This synchronization may arise after the merger, though, facilitated by the currency area.

Periklis Gogas looks at the Euro-zone and comes to the conclusion that synchronization has increased, especially with the last global recession. While the paper has plenty of robustness exercises, I fail to be convinced, though. Indeed, this supposed trend is based on two, maximum three, business cycles. And the last recession was of a different kind, being global, so it is difficult to avoid having it more synchronized than any other in the sample. You may argue that there are 86 quarterly observations and this is sufficient for statistical significance. But when you look at such questions, it is turning points that matter, and you only have a handful, and they do not look like a random sample of the population.

Where did the gender unemployment gap go?

There was a time where females had little attachment to the labor force, and employers also considered them to be the easiest to dispense with in the case of a downturn. These lead to a gender unemployment gap, with females proportionally more unemployed. Times have changed. Females are now in many households the main breadwinners and thus more attached to the labor market than men, even during recessions. This has manifested itself in full force during the last one, which has been dubbed a "mancession" by some because the unemployment rate rose more for men than for women. That was new, and needs an explanation.

Stefania Albanesi and Ayşeg&uum;l Şahin use a three-state labor search model to understand the data in various OECD countries. They confirm that the change in relative labor attachment explains the disappearance of the long-run gender unemployment gap. At business cycle frequencies, and in particular during recessions, the key is in the sectoral distribution of the female and male workforce. And as this distribution evolves, females benefit from more employment stability than men. Is this last recession a breakpoint for the labor market? There are so many things that are different from before, like super-low employment rates, hysteresis, and declining labor income shares. This all points to structural changes, and we should forget getting back to pre-recession labor markets.

Mortgage refinancing is not that hard

We continuously take economic decisions. Most of the time, they are trivial. Sometimes they are important, and any sensible person thinks hard before settling on an option. Purchasing a home is complex, for example. Can one afford it? Is it the right price? How will it evolve? How is the financing? Comparatively, refinancing a mortgage is relatively easy: what is the interest saving? What are the fix costs? How long does one expect to hold this mortgage?

Yet, it appears a substantial fraction of those refinancing their home mortgage make lightheaded mistakes, according to Sumit Agarwal, Richard J. Rosen and Vincent Yao. Using a dataset that covers homeowners who only refinance to reduce mortgage payments, they find that 52% pick the wrong interest rate (off by at least 50 basis points) and 17% wait at least six months too long, likely because they do not monitor rates. That could be excused by inattention, but when you consider the amounts involved, they would need to have some very lucrative alternative uses of their time. That is quite disappointing for those who model optimizing agents.

Biased taxable income elasticities

Anytime you apply a distortionary tax, it bring well-being losses from the distortion (although the revenue can be used for well-being enhancing public goods). In addition, there are social losses that arise from the fact that people try to evade the tax by shift to other goods, go informal, or in the case of income shift compensation to non-taxable benefits or other amenities like more flexible work hours. Traditionally, the literature has evaluated the deadweight loss from taxation by looking at the income elasticity of the tax. That may be too simple a statistic in this case.

Brendan Epstein and Ryan Nunn show that ignoring the endogeneity of the non-taxed benefits and amenities leads to serious biases in the income elasticity and thus deadweight loss, to the point that it provide not good guidance on how to set tax rates. They basically do this by providing examples: build simple models, calibrate them, generate data from them and show that the usual empirical method provide crassly wrong estimates. An econometrician could in principle do better by taking all this in account, unfortunately data will be very hard to come by for this.

Why collective wage agreements are bad

Collective bargaining has a few advantages over the alternative, each firm bargaining individually with each trade union. It allows to internalize externalities in the bargaining process. It reduces negotiation costs per firm and union, although it may take longer than for the alternative. However, it prevents individualizing contracts to local circumstances, something that becomes more important as the workforce is getting more human capital and more specialized. Finally, there is that thing with market power.

Xiaomin Cai, Peter Gautier and Makoto Watanabe try to disentangle some of these costs and benefits within a on-the-job search model where both sides are heterogeneous. There is a wage than a planner would use in this context, and it is uniform. However, absent the collective bargaining, you would want wage heterogeneity, because this allows for firms to signal to workers that they have higher labor productivity. Thus, it is better if firms cannot commit to the uniform wage of collective bargaining than if they can commit. A rather unique situation where commitment is bad. And in an empirically plausible case, it is even better not to be restrained by collective bargaining altogether.

Bargaining power and international pricing

In international trade, how is the currency of invoicing determined? This is a big deal as it determines how is carrying the exchange rate risk. Even though this can be hedged, this still has a cost. And in this context, why is there quite frequently billing in a third currency? With such a "vehicle currency," bot exporter and importer face exchange rate risk. That does not seem right.

Linda Goldberg and Cédric Tille draw a theory of bargaining over price and exchange rate exposure between exporters and importers. An important element in this theory is the market structure. To gain a larger effective bargaining weight, you need to be larger and more risk tolerant, so surprise here. Then you also bear more exchange risk. Also, the size heterogeneity of firm on a market matters as well: the smaller firms then inherit the bargaining characteristics of the dominating ones. It would be interesting to see a test of this theory.

Savings and religion II

Various religions have different prescription on how rich people should be. Early Christians advocated low wealth and much redistribution, modern American Protestants seem to lean more towards wealth accumulation and little redistribution, to cite some extremes. What impact does religion have on savings behavior? Of course, nowadays it matters how religious people are. Conditional on a high level of religiosity, the religious affiliation should then matter. Earlier work using the PSID yields results that are puzzling to me: atheists save less.

Can new work by the same author, now going by the name of Anja Köbrich León, with the same dataset be illuminating? Well, not quite. In fact, the results do not seem to be robust across econometric methods, indicating some serious endogeneity issues, as has been hinted in the comments of the first post. So there, I had good reason to be puzzled.

PS: the earlier work is not cited in the extensive literature review. Is Anja hiding something here?

Politics does not make one happy

Humans are social animals and they benefit from interactions with others, most of the time. Personally I enjoy spending time with family, colleagues and neighbors, although I get really frustrated with anything related to politics, as may have transpired on this blog. Does this very anecdotal evidence generalize?

Stephan Humpert takes a German survey and checks how membership to various social groups effects life satisfaction. It is not a surprise there are stark gender difference, although not necessarily the way I would have thought. For example, men are particularly enthused by hobby clubs. Women particularly enjoy parents associations and citizens initiatives, and also sports societies, 26% being members in those. So much for the image of women being uninterested in sports. However, they dislike being in trade unions. Well, trade unions may follow peer pressure at work and may be understandable. Politics are rather neutral in terms of satisfaction. I guess Germans do not get as frustrated as I do, at least those involved in politics.

On the benefits of an international education

Universities encourage study abroad programs because it is a good experience for students to learn about others cultures (and in the case of expensive colleges, a cheap way to make money while students continue to pay tuition). With the Erasmus program in Europe where local tax payers typically foot most of the bill for higher education, the question arises whether it is worth paying for the education of foreigners. Of course, there is a chance that they would stay and thus only one year of all their education has been paid. And this does not necessarily have to be a zero-sum game, as the international education should be enhancing. Oh, and the Erasmus program also seeks to establish more pan-European ties, so there is a political motive at least.

Jan Bergerhoff, Lex Borghans, Philipp Seegers and Tom van Veen try to look into the impact of international higher education using the Lucas growth model. Students study abroad if they find it in their interest, which in this model means that they can benefit from higher human capital in the other country, implying a faster human human capital accumulation the more foreign students there are. The probability the students are staying is then exogenously calibrated. The authors find that the impact on growth rate should be positive, while still modest at current internationalization rates. on a personal level, i can only recommend study abroad, it has certainly helped me, even though my host country probably did not get much out of it.

Why so much policy focus on home ownership?

Some have blamed the Community Reinvestment Act (CRA) for the too risky lending to US homeowners during the house price run-up. Actual evidence for this is hard to come by, though. In this previous post, I discuss that there was indeed more risk taken, but it is not clear whether that additional risk was priced in or not. And were we to blame CRA, it would show in banks giving loans to neighborhoods that should not have received them for economic reasons, only to satisfy CRA.

Patrick Bayer, Fernando Ferreira and Stephen Ross look at the history of mortgages that they can link to credit scores and demographic characteristics. They find that for the same credit score, blacks and Hispanics were much more likely to run into mortgage trouble. While the authors do not mention this, the CRA was clearly targeting neighborhoods with such populations, and banks had to lend more there to comply. This would indicate that there is at least some truth to the CRA blaming. The authors frame this result rather by writing that this is evidence that favoring homeownership is not a good way to reduce wealth disparities. I would agree, but also because owning a home is very poor diversification, especially when this is all the wealth you can have. And there is no evidence that homeownership is good anyway, to the contrary.

Open science in commercial firms

Universities engage in research and put result in the public domain because it fosters the public good. In recent years, though, they have put more focus on patenting research results in order to obtain more revenue in the face of dwindling income from public sources. For-profit firms, though, seem to follow the opposite evolution. They hire more and more researchers to let them publish their results in scientific journals instead of patenting them. This even happens to economists who get hired, for example, by Google, Microsoft, Yahoo, AT&T, and commercial banks to conduct research. For the economists, I kind of understand it as a way to secure top talent when needing advice in complex markets. For hard sciences and engineering, my prior is that these firms have realized that patenting has become very inefficient as seeking exclusivity is now more of a lawyer's than a scientist's job.

Markus Simeth and Julio Raffo have another interpretation of what is happening in for-profit firms, and it looks like what is happening for economists. Using a dataset of R&D performing firms in France that they match with academic publications, they find that the old way of just collaborating with academics is not sufficient to acquire knowledge from the technology frontier, you need to hire them full-time. Adopting the academic discourse and disclosure allow to also benefit from it. And like firms participating in the open source movement, I suppose participating in the open dissemination of science also buys you some academic credibility that can attract top talent.

Unemployment benefits extensions and unemployment spells

During the last recession in the US, the maximum duration of unemployment insurance benefits has been extended several times. The justification has been that as the unemployment rate is higher, it is more difficult for the unemployed to find jobs, and they should not be blamed for not finding one in due time. Of course, this raises the specter of moral hazard, as they may not be enticed to search for a job as avidly as before. The question is then, how much has the unemployment rate increased due to this extension and the associated moral hazard? I reported previously on a nice paper that used extensive theory and calibration to come to the conclusion that about a quarter of the increase in the unemployment rate can be attributed to this. By now, though, we have good data that should allow an empirical analysis.

Henry Farber and Robert Valletta provide the first serious estimations I have seen. They exploit cross-state variations in the extensions to identify their impact on job market transitions. They find little effect from the extensions on re-employment probabilities. Rather, they have prevented people from exiting the labor force, which is surprising given the severe decline in the labor force even after the recession was declared over. This means that the impact on unemployment duration is rather modest on average, but larger for the long-term unemployed. In the end, only a tenth of the increase in the unemployment rate can be traced to the benefit extension.