Keynes Vs. Hayek

Here’s a link, from BBC Radio 4, to the debate between George Selgin and Jamie Whyte on Team Hayek and Lord Skidelsky and Duncan Weldon on Team Keynes on the virtues and vices of Keynesian economics.

What caused the financial mess we're in? And how do we get out of it? Two of the great economic thinkers of the 20th century had sharply contrasting views: John Maynard Keynes believed that government spending could create employment and longer term growth. His contemporary and rival Friedrich Hayek believed that investments have to be based on real savings rather than increased public spending or artificially low interest rates. Keynes's biographer, Professor Lord Skidelsky, will take on modern day followers of Hayek in a debate at the London School of Economics. Paul Mason, economics editor of Newsnight, is in the chair.

Foreign ownership may be good for you, if you are a firm that is

Foreign ownership of firms is one of those topics which, for reasons I have yet to workout, generates much heat and little light. There are those who just seem to oppose it for reasons that have little to do with the economics of the situation. A working paper by Francisco Pérez-González, of the Stanford business school, looks at "The Impact of Acquiring Control on Productivity". The abstract reads,

Empirical studies on the importance of control rights on efficiency are hindered by actual –presumably efficient– ownership patterns. Finding settings where the right owner does not own the right asset and where ownership arbitrarily changes is challenging. In this paper I aim at overcoming these problems by investigating the elimination of foreign majority ownership restrictions in Mexico. Specifically, I study the performance of affiliates of multinational corporations for which (1) ownership restrictions appeared to bind before they were lifted, and (2) parent ownership increased from minority to majority as the reform was implemented. Using detailed plant-level information, I find that multinational control leads to large improvements in total factor productivity, particularly in industries that rely on technological innovations from their parent companies. Control is also associated with higher investment –particularly in technology intensive forms of production–, and with an improvement in the skill profile of the labor force. Overall, I interpret the evidence as supportive of the property rights theory of the firm.

The conclusion says, in part

In this paper I study the impact of acquiring majority ownership on the performance of Mexican affiliates of multinational corporations (MNCs.) I use the elimination in foreign majority ownership restrictions as a plausible source of exogenous variation.

I find that the allocation of control does affect production decisions and production efficiency. The results show that ownership restrictions to foreign ownership harmed the production efficiency of affiliates of multinational corporations. Upon liberalization, a large fraction of minority owned affiliates became majority or wholly-owned by their parent companies. Plants for which foreign ownership translated into majority or full ownership experienced economically and statistically large productivity gains. Overall, the analysis shows strong evidence that the choice of organizational form affects productivity, particularly in technology intensive industries.

The evidence suggests that government policies directed to attract technological transfers should recognize the importance of residual control rights, particularly in countries with weak legal enforcement. Governments often limit foreign ownership to promote local interests or to prevent expropriation by multinationals. While domestic majority rules do shift the balance in favor of local partners, the impact on overall welfare is uncertain. Fear from expropriation by local partners deters foreign investors from sharing their technologies or making country specific investments, which does hurt economic performance.

In short what Pérez-González finds is that a movement to majority foreign ownership, via increased control by a foreign multinational, leads to large improvements in total factor productivity and to higher levels of investment .

For the geeks out there, Pérez-González interprets this evidence as supportive of the property rights theory of the firm as developed by Grossman and Hart (1986) and Hart and Moore (1990).

“Keynesian Death Spiral”

Jerry O’Driscoll discuses the problem at the ThinkMarkets blog. He writes,

The more powerful one believes fiscal stimulus to be, the more adept the Keynesian policymaker must be. If the stimulus has powerful positive effects when added, it will have powerful negative effects when withdrawn. Hence, the application of stimulus and its withdrawal must be precisely timed. An economist would ask from whence the knowledge to do this would come.

As Hassett notes, however, stimulus has not two but three stages. It may boost growth when added, but must slow growth when withdrawn. The third stage comes when taxes (current or future) must be paid to fund the stimulus. That stage is always negative in its effects. Thus, Hassett concludes that “the total impact of the Keynesian policy is negative over its life.”

But politicians use an aggressive stimulus to avert what they see as near-term distress which has negative effects when removed or has to be paid for so they use another stimulus to avert another near-term set of problems which ..... and the cumulative effect of which can be ruinous.

The Eurozone crisis: Greek recovery and the challenges of asymmetric monetary union

At VoxEU.org David Vines talks to Viv Davies about the recovery prospects for Greece following the country’s second bailout. They discuss the challenges of asymmetric monetary union, Eurobonds, the peripheral economies and the current situation in Italy. Vines presents the case for stronger fiscal management and political leadership.

How minimum wages encourage discrimination

Yet another unfortunate consequence of minimum wages is the encouragement it gives for discrimination. Karthik Reddy writes on this point over at the IEA blog. She explains,

The free market is a powerful tool that forces market participants to pay for their discriminatory tendencies. In a free market system, for example, if a discriminatory employer would like to hire a worker to do some task, and the employer is, say, disinclined to hire blue-eyed workers, he must be willing to pay for the extra cost of brown-eyed labour if he follows his discriminatory tendencies; blue-eyed labourers faced with such discrimination may compete on the basis of price and lower the wage they receive.

A wage floor, however, prohibits workers from competing amongst one another on the basis of price, and removes economics from the discriminatory employer’s decision-making process. The employer must pay potential labourers, whether blue-eyed or brown-eyed, the same wage, and because the equal wage ensures that this employer will pay no price to discriminate against the blue-eyed worker, he is free to make his hiring decision on some basis other than price and productivity, and will hire the brown-eyed worker.

Such an outcome is in this day and age an unintended consequence of minimum wages but a consequence none the less.

Reddy continues,

This theoretical discussion is not without real-world evidence; there have been instances in societies with significant racial animosity of the use of wage floors as tools to deliberately diminish the labour participation of certain groups. In the early twentieth century southern United States, for example, racist activists trying to exclude black Americans from the workforce found minimum wages to be an effective tool to accomplish this insidious goal in a seemingly inoffensive way.

In 1909, the prejudiced Brotherhood of Locomotive Firemen demanded that the Georgia Railroad fire all Black workers. Economist Walter Williams observes that instead of such a transparent and overtly discriminatory measure, the exclusion was accomplished through the imposition of wage controls: ‘Instead of eliminating blacks … the arbitration board decided that black firemen, hostlers, and hostlers’ helpers should be paid wages equal to the wages of white men doing the same job.’1 The strategy satisfied white unionists, who knew that when forced to pay an equal wage to blacks and whites, discriminatory employers would no longer pay any cost for their discrimination and would hire white workers at the expense of blacks. The union stated: ‘If this course of action is followed by the company and the incentive for employing the Negro thus removed, the strike will not have been in vain.’

Similarly, white supremacist groups in South Africa under apartheid pushed for minimum wage laws as a way to reduce black participation in the labor force. The overtly racist Mine Workers Union, for example, demanded a minimum wage to protect their dominance in the workplace and openly stated: ‘The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.’ Similarly, the South African Wage Board, which set minimum wages in different sectors of that country’s economy beginning in 1925, ‘concentrated its wage determinations only on those areas of industry where nonwhites were in competition with whites, and made no wage determinations in areas where there was no such competition.’

As noted above, modern minimum wage laws are not, we hope, imposed with such underhanded or targeted intentions. But it still turns out that the use of minimum wages to achieve discriminatory ends is indicative of the ability of wage floors to erase the cost employers must pay to discriminate. And demand curves slope downwards, as something gets cheaper you get more of it. So whether or not it is intentional it has to be recognised that discrimination increases to the extent that minimum wages rise above the market wage.

Incentives matter: blood file

In an article from VoxEU.org Joan Costa-i-Font, Mireia Jofre-Bonet and Steven Yen argue that paying some people to donate blood while others receive a cursory “thanks” has been shown to crowd out the altruistic donors. They write,

Individuals might undertake certain altruistic actions guided by an extrinsic motivation, including a “warm-glow” or moral satisfaction. Trying to answer the question of whether altruistic behaviour can be incentivised, in recent research (Costa-Font et al. 2011) we investigate whether different financial and non-financial incentives have the same effect on willingness to donate when other observed and unobserved factors are controlled for. In particular, we investigate whether crowding-out takes place with all kinds of rewards, or specifically with only monetary rewards. We answer this question by exploiting a large data set representative of 15 European countries containing information on whether or not an individual has been a donor in the past and her preferences towards monetary and non-monetary compensation for blood donation. This information allows estimation of two recursive equation systems and exploration of the relationship of preferences over different types of rewards and the probability of being a donor.

Importantly, we find that a monetary reward reduced the probability of donation consistent with the crowding out hypothesis, whilst a non-monetary reward consistently with a normal supply curve suggests a positive and significant effect on the donation probability.

These results are robust to different specifications and indicate that crowding out is a phenomenon linked to the introduction of a market-based rationale for non-market decisions, and that socially motivated individuals remain willing to donate when non-monetary rewards are offered.

and

Non-monetary rewards could potentially be used to incentivise blood donation as this kind of rewards seem not to remove, in the terminology of Andreoni et al. (2008), the warm-glow associated to blood giving.

So incentives matter, but the form the incentive takes may also matter.

But on blood donations and incentives compare the above with this study: Will There Be Blood? Incentives and Substitution Effects in Pro-social Behavior by Nicola Lacetera, Mario Macis and Robert Slonim, Discussion Paper No. 4567, November 2009, Institute for the Study of Labor. The abstract of the paper reads:

We examine how economic incentives affect pro-social behavior through the analysis of a unique dataset with information on more than 14,000 American Red Cross blood drives. Our findings are consistent with blood donors responding to incentives in a “standard” way; offering donors economic incentives significantly increases turnout and blood units collected, and more so the greater the incentive’s monetary value. In addition, there is no disproportionate increase in donors who come to a drive but are ineligible to donate when incentives are offered. Further evidence from a small-scale field experiment corroborates these findings and confirms that donors are motivated by the economic value of the items offered. We also find that a substantial fraction of the increase in donations due to incentives may be explained by donors substituting away from neighboring drives toward drives where rewards are offered, and the likelihood of this substitution is higher the higher the monetary value of the incentive offered and if neighboring drives do not offer incentives. Thus, extrinsic incentives motivate pro-social behavior, but unless substitution effects are also considered, the effect of incentives may be overestimated.

• Andreoni, J, WT Harbaugh, L Vesterlund (2008), “Altruism in experiments”, in SN Durlauf and LE Blume (eds.), The New Palgrave Dictionary of Economics, 2nd Edition, Palgrave Macmillan, 134-138.
• Costa-Font, Joan, Mireia Jofre-Bonet, Steven T Yen (2011), “Not All Incentives Wash Out the Warm Glow: The Case of Blood Donation Revisited”, CESifo Working Paper No. 3527.

Interesting blog bits

1. rauparaha on Greens on poverty

   I like the idea of helping poor families but is the best plan really to:
   

   • raise marginal tax rates on them,
   • give them cheaper bachelor’s degrees,
   • increase the barriers to entering the workforce at the minimum wage; and,
   • increase the cost of rental properties?

2. Eric Crampton explains Why I still can't take the Greens seriously

   I love the Greens on civil liberties, or at least relative to most other parties and with a big caveat on their nannying proclivities with respect to tobacco and fatty foods. And they're good on copyright. But their economic policy prescriptions...egads.

3. Seamus Hogan gives us A Diatribe Against Capital Gains Taxes-Part I

   I noted in my post on Labour’s tax policy here that there were arguments on both sides for capital gains taxes. This was a euphimistic way of saying that there are economists who I respect who are in favour of capital gains taxes, so I wouldn’t want to dismiss the idea out of hand, but I have a hard time understanding how they could come to that conclusion. So I am going to lay out the case against in a couple of posts. Most of the points below are standard fare but a couple of them I haven’t seen before.

4. Seamus Hogan gives us A Diatribe Against Capital Gains Taxes-Part II

   I noted yesterday that the main argument put by proponents of capital gains taxes is that they are needed to encourage savings into productive investments rather than into chasing capital gains. This sounds plausible on the surface, but I’m not sure that those making that argument have fully stated their implicit assumptions.

5. Seamus Hogan gives us Capital Gains Taxes Redux

   A couple of comments on my previous posts have suggested two possible efficiency motivations for having capital gains taxes. Both are theoretically correct, but neither makes a convincing case for a real-world CGT, in my opinion.

6. Freakonomics on Killer Cars: An Extra 1,000 Pounds Increases Crash Fatalities by 47%

   Ever since the SUV craze began in the late 1980s, we’ve all known that heavier vehicles are safer for those driving them, but more dangerous for others on the road. Which is why we all started driving them. Now, in a new working paper, a pair of Berkeley economists have quantified not only the fatality risks of heavier cars for other drivers, but also the costs associated with them.

7. Quamrul Ashraf and Oded Galor on The “Out of Africa” hypothesis, human genetic diversity, and comparative economic development

   The reasons given for the vast divide in standard of living between different parts of the world are many, with some economic historians claiming the roots lie in the colonial period. This column goes back even further to the cradle of humankind in East Africa, suggesting that the genetic diversity of the tribes that dispersed to different parts of the globe determined their success many thousands of years later.

8. David Starkie argues that Air Passenger Duty - damaging a major growth industry

   UK aviation has been a major growth industry in recent years, with high gross value added - just the sort of industry you might imagine the government would wish to encourage. Yet recent changes to Air Passenger Duty (APD) mean that it is the most highly taxed aviation industry in the world and it is showing serious signs of fatigue.

9. Mark Pennington on Ha Joon Chang: Wrong on Free Trade, Markets and Development

   My first post on 23 Things They Don’t Tell You About Capitalism addressed Ha Joon Chang’s dubious debating tactics when discussing ‘free market economics’. I turn now to some of Chang’s more specific critiques of economic liberalism to illustrate these tactics in greater detail.

EconTalk this week

Anat Admati of Stanford University talks with EconTalk host Russ Roberts about ways to make the financial system more stable. In particular, Admati explores the implications of higher capital requirements. She argues that current policies subsidize leverage--high levels of debt relative to equity--and that current levels of leverage increase the vulnerability of the system to swings in asset prices. She then gives her response to criticisms of higher equity levels. The conversation concludes with a discussion of the role of academic economists and finance professors as advocates for various policies.

The impact of Chinese imports on innovation, it, and productivity

Writing in the August 2011 issue of The NBER Digest Laurent Belsie notes:

In Trade-Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity (NBER Working Paper No. 16717), authors Nicholas Bloom, Mirko Draca, and John Van Reenen examine more than a half million firms in 12 European countries between 1996 and 2007. They find that every 10 percentage point rise in Chinese imports in a firm's industry was associated with an increase of: 3.2 percent in patents, 3.6 percent in IT spending, 12 percent in R and D spending, and 2.6 percent in total factor productivity (TFP). The authors observe that more innovative firms tended to grow while the less innovative ones tended to shrink or disappear altogether. In fact, they conclude, a surge in Chinese imports appears to have been responsible for about 15 percent of the technological upgrades at European firms between 2000 and 2007. At the same time , that surge led to decreases in employment, profits, prices, and skill share in the affected industries. Imports from other low-wage nations had a similar impact, but imports from developed nations did not.

"What may be happening is that trade is stimulating technical progress, which in turn is increasing the demand for skilled labor," the authors write. "It is not simply that patents per worker, or average TFP, increases -- total innovation in the affected firms and industries expands when they face more exogenous threats from Chinese imports." One explanation may be that companies already have certain "trapped factors," such as equipment or firm-specific skills, which they might as well try to use to develop new processes or products. Opening up to trade effectively lowers their opportunity cost of innovation.

At the same time, employment is being reallocated among firms. For every 10 percentage point increase in imports, employment falls 3.5 percent overall in the affected sectors, but this decline is not shared evenly. Highly innovative companies are more likely to grow; less innovative ones are more likely to shrink. A 10 percentage point increase in Chinese imports decreases the probability of survival of European firms by about 17 percent.

To correct for the possibility that unobserved technological shocks affected their results, the authors examine the effects of Chinese imports after China`s entry into the World Trade Organization, which led to the end of import quotas on textiles and apparel. This allows them to study industries that had widely different experiences after trade liberalization and to focus on textiles and apparel: although relatively low tech, they were still the source of more than 22,000 patents from European companies during the period they study. The authors also control for differential industry-specific time trends and exploit the fact that Chinese imports tended to increase where China already had established a "bridgehead" by the mid-1990s. The results support their main conclusion that Chinese trade spurred innovation.

The authors conclude that the surge in Chinese imports was responsible for about 15 percent of European technological change for the whole period from 2000 to 2007, but the impact now seems to be growing stronger. They write that "this effect appears to be increasing over time and may even be an underestimate as we also identify a role for offshoring to China in increasing TFP and IT adoption (although not for innovation). This suggests that increased import competition with China has caused a significant technological upgrading in European firms in the affected industries through both faster diffusion and innovation."

Yet another reason to fight for free trade. An increase of 10 percentage points in Chinese imports in a firm's industry is associated with an increase of: 3.2 percent in patents, 3.6 percent in IT spending, 12 percent in R&D spending, and 2.6 percent in total factor productivity (TFP). Under increased competition from imports the more innovative firms grow while the less innovative ones tend to shrink or disappear. Overall, competition from imports is significantly increasing technological upgrading. This is all to the good.

Economists thinking about sex

I came across this piece by (non-economist) Grover Cleveland at the Pileus blog. Cleveland writes,

I was stuck at the airport for much of last Saturday and so perused the magazine racks there at some length during breaks from the pain of trying to work in an airport chair. At one point, my eyes wandered over to the newest edition of Psychology Today - a pretty awful magazine - and noticed the front cover advertising an article titled something like: Why Smart People Have Less Sex. (Emphasis added)

Well, this just goes to proves I must be a genius! :-(

Cleveland goes on to note that

I instantly and without really thinking at all said to myself, “Well that must be due to their higher opportunity cost,” before I even processed anything on a more intellectual level or even picked up the magazine. I decided to see if the article did touch on this (obvious) possible explanation and was disappointed during a quick perusal to see it wasn’t really discussed as an alternative in anything more than a cursory fashion.

May be I should point out that the tile of the Cleveland's article is "I’m spending too much time around economists". Personally I don't see how that's possible, but may be that just me.