Career costs of children (updated)

In short, big.

A new paper just out in the Journal of Political Economy (vol. 125, no. 2, April 2017, pp. 293-337) look at "The Career Costs of Children". It is by Jerome Adda, Christian Dustmann and Katrien Stevens.

The abstract reads:

We estimate a dynamic life cycle model of labor supply, fertility, and savings, incorporating occupational choices, with specific wage paths and skill atrophy that vary over the career. This allows us to understand the trade-off between occupational choice and desired fertility, as well as sorting both into the labor market and across occupations. We quantify the life cycle career costs associated with children, how they decompose into loss of skills during interruptions, lost earnings opportunities, and selection into more child-friendly occupations. We analyze the long-run effects of policies that encourage fertility and show that they are considerably smaller than short-run effects.

Adda, Dustman and Stevens point out that women have a number of disadvantages in the labour market and note that

Having children may be one important reason for these disadvantages, and the costs of children for women’s careers and lifetime earnings may be substantial.

Interestingly Adda, Dustmann and Stevens look at the gender wage gap,

Using a sample of comparable male cohorts who made similar educational choices, we run simulations to understand better the wage differences between women and men over the life course and how these are affected by fertility decisions. We find that fertility explains an important part of the gender wage gap [about one third], especially for women in their mid-30s.

What drives the cost of children?

Thus, the costs of fertility consist of a combination of occupational choice, lost earnings due to intermittency, lost investment into skills, and atrophy of skills while out of work and a reduction in work hours when in work. In addition, fertility plans affect career decisions already before the first child is born, through the choice of the occupation for which training is acquired—an aspect that is important not only for policies aimed at influencing fertility behavior but also for understanding behavior of women before children are born. An important additional aspect for the lifetime choices of fertility and career is savings that help women to smooth consumption. Furthermore, fertility leads to sorting of women into work, with the composition of the female workforce changing over the life course of a cohort of women, because of different career and fertility choices made by women of different ability.

and early occupational choice really affects wages,

Occupational choices at the beginning of the career, and before any fertility decision is made, represent 19 percent of the overall costs induced through wages, indicating that a substantial portion of the wage-induced career costs of children is already determined before fertility decisions are made, through occupational choices conditioned on expected fertility pattern.

Another factor influencing women's is is the amenity value of an occupation with regard to children (which can be interpreted as the ease with which women in these occupations can combine work with child raising).

We present estimates of these amenity values, normalized to be zero for routine occupations, in panel C of table 3. The figures show that—in comparison to routine jobs—abstract jobs are least desirable when children are present. Our estimates imply that if abstract and manual occupations had the same amenity value as routine ones,the proportion of women opting for abstract or manual occupations would increase by 5 percent. The amenity of part-time work—an option chosen by many mothers in our data—is likewise lower in abstract jobs, as the second row of this panel shows. Our estimates imply that if women in abstract jobs had the same amenity value for part-time jobs as in routine ones, the proportion of part-time work in abstract jobs would be 7 percent higher by the age of 30.

All this points to there being a complex interaction between career and fertility decisions with the costs of children often being high.

Update: Thanks to a message in the comments section we learn that you can get an open access version of the paper here.

Should we worry about monopoly? (updated)

The obvious answer that most people would give would give is yes, but that answer may be wrong.

Having a monopoly may not be a problem if that monopoly is contestable. The danger with monopolies isn't the monopoly as such, its the ability to exploit that monopoly that is the problem.

Writing over at the Forbes blog Tim Worstall makes this point with a couple of nice examples:

As I've pointed out before I had an effective monopoly on the global trading of scandium for a few years. And I didn't exploit it because I wasn't able to. Being a scandium dealer was just a matter of putting in a couple of month's work to find out who produced and who used and making sure you had their phone numbers. I wasn't able to therefore jack up my prices and wax fat off my monopoly--because what I had was an eminently contestable monopoly. Indeed people came along, contested it and I'm not in the field any more.

The important thing about monopolies therefore is not whether one exists. It's whether someone is trying to exploit it and if they are, can people contest that monopoly?

Take another such monopoly that people have worried about recently. In 2010 China started trying to exploit it's near monopoly of the production of rare earths. As I pointed out back then that was a contestable monopoly they had. Their throwing their weight around would lead to competition. As it did. China's monopoly was broken and prices are now well below what they were in 2010.

Tim notes that the recent decision by the European Union Commission to block a merger between the London Stock Exchange and Deutsche Boerse (German marketplace organizer for the trading of shares and other securities) was wrong because even if the merger did create a "de facto monopoly" in the clearing of bonds and fixed-income products, as the Commission claims, the important question is if the merged company tried to exploit their monopoly could competition to it arise? Would competitors be able to enter the market? If so there are no grounds to stop the merger.

Thus even if we see an increase in concentration in markets which looks like a move towards monopoly before we panic one question we have to ask is, is that monopoly one which could prevent entry into its market if it was to attempt to exploit its market power? If not then increased concentration is not as dangerous as it may look at first glance.

Update: In a related posting Levi Russell discusses Contestability theory in the real world [Ag-Biotech Symposium]

Steve Hankie on hyperinflation

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Steve Hankie on hyperinflation.

Steve Hanke is a professor of applied economics and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. He is also a senior fellow and director of the Troubled Currencies Project at the Cato Institute. Steve joins the show to discuss his work on the history of hyperinflations. David and Steve discuss what exactly constitutes hyperinflation as well as historical examples of hyperinflation from 1940s Hungary to present-day Venezuela.

Doug Irwin defends the benefits of free trade

This video comes from Uncommon Knowledge with Peter Robinson at the Hoover Institution.

Professor Douglas Irwin defends the benefits of free trade and explains why protectionism, high tariffs, and currency wars could cause economic problems. Irwin explains the misconceptions around trade surpluses and deficits and the historical consequences and benefits of trade. He talks about an absolute versus comparative advantage with trade and why and how a trade deficit with China still benefits the United States. Irwin refers to Adam Smith’s view of trade in explaining the absolute advantage of trade. Smith argued for unregulated foreign trade, reasoning that if one country can produce a good, for example, steel, at lower costs than another country, and if a different country can produce another good, for example, an iPhone, at lower costs, then it is beneficial to both parties/countries to exchange those goods. This has become known as the absolute advantage argument for both international and domestic trade.

Irwin notes that trade still benefits the United States enormously and that striking back at other countries by imposing new barriers to trade and/or ripping up existing agreements would be self-destructive. Finally, Irwin talks about problems within the American economy, how too many people are not working, which cannot be blamed entirely on the trade deficits. Some reasons people cannot find jobs are mechanization, efficiency, productivity, technology, and skills. Irwin discusses a few options for helping people with limited education and few skills survive, including paying a basic wage, improving our educational system, and reducing regulations so the costs of hiring an employee are not as steep.

Dennis Carlton on concentration in American industry and competition policy

This is from a short interview with Dennis W. Carlton, the David McDaniel Keller Professor of Economics at the Booth School of Business at the University of Chicago, dealing with the question, Does America have a concentration problem?

Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

There is some evidence of increased concentration. But the evidence I have seen in manufacturing (I thank Sam Peltzman for his data) suggests that these increases are unlikely to have large effects on the U.S. economy. For example, using census data, with all its limitations such as ignoring imports, the evidence indicates that the U.S. economy is still generally characterized by manufacturing industries with low concentration levels.

I am skeptical of claims and have seen no convincing evidence that increased concentration overall across all industries has been a major factor in explaining poor U.S. economic performance.

Q: In your opinion, what are the main reasons for the rise in concentration?

Technology explains the rise in concentration in some industries. Regulation, which tends to burden small firms disproportionately, explains it in others.

Q: Which industries should we be concerned with when we look at questions of concentration? Do we have evidence of excessive market power, reduction in quality or investment, or growing political influence?

Every industry with very high concentration deserves scrutiny from an antitrust viewpoint. Industries where data collection is important might raise privacy issues that need to be addressed, in addition to antitrust issues.

Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

Concentration in the financial industry can raise antitrust concerns. The recent ABA advisory report on antitrust for the next administration raises this issue and suggests that the Federal Reserve should not adopt different merger standards than the Department of Justice.

But if the question is suggesting that bank concentration is responsible for increased concentration in other industries, I have seen no evidence of that.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

The report of the Antitrust Modernization Commission explicitly addressed the question of the adequacy of antitrust laws in light of new technologies in great detail, and the bipartisan panel concluded that the current antitrust laws were indeed adequate. However, special concerns regarding privacy protection can arise.

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

Technology influences market structure. Technology is the major factor explaining earnings inequality. But it would be misleading to say that an exogenous increase in concentration is the significant cause of increased earning inequality. The changing role of jobs because of technological change is the major reason for increased inequality.

As to the big question as to what we could see with regard to antitrust policy under the Trump administration Carlton has this to say (pdf) in the February 2017 (Vol 16 No 4) issue of The Antitrust Source.

Over at least the last ten years, complaints that antitrust policy is too lax have grown steadily in volume. Some critics have even suggested that the U.S. economy has become less competitive as a result, which they argue has led to slowing economic growth and increasing income inequality. I hope that the Trump administration’s response to such claims will be to ask for the evidence that supports these views before altering antitrust enforcement. This does not mean that the complaints should be ignored. To the contrary, it means that the Trump administration should alter antitrust policy to address concerns only when those concerns are based on evidence—not rhetoric—and only when those concerns can be appropriately addressed by antitrust policy. In the wake of these criticisms of antitrust policy, President Obama called not only for the government antitrust agencies to pursue vigorous antitrust enforcement but also for regulators to intervene in the industries they regulate to make them more competitive. I hope that the Trump administration will ask for specific evidence that any proposed regulatory intervention would likely improve competitive conditions in particular industries. The experience of regulation shows that often (though not always) regulatory intervention harms rather than helps competitiveness and economic performance, sometimes by making it more difficult for new firms to enter an industry.

Some have called for antitrust policymakers to take into account the effects of antitrust policy on income inequality and unemployment. My hope is that the Trump administration will use antitrust policy only for what antitrust does best—protection of the competitive process. Goals such as reducing poverty or decreasing unemployment are important but antitrust policy is ill-suited to achieve those goals. Over time, competition raises living standards by allocating resources to new, higher valued uses. Attaching other goals to antitrust enforcement can interfere with that process.

There are many antitrust topics that the Trump administration can usefully address. It can encourage the use of retrospective studies to evaluate past mergers as well as the techniques used to evaluate those mergers. Did past mergers systematically raise prices and do our techniques identify such cases or not? Noting that price goes up in some mergers is not a sufficient analysis unless one also takes into account that prices go down in other mergers. The issue is whether we see a systematic bias in what our government agencies are doing. A small sampling of other important topics would include guidance on the antitrust analysis of two-sided markets, bundled discounts, and tie-in cases. Finally, the FTC should think hard about its consumer protection mission, especially with regard to privacy.

From the comments

In the comments to the previous posting "A brief prehistory of the theory of the firm 2" Mark Hubbard asks,

I have no great problem with the corporation. Like all institutions it comes with advantages and disadvantages. I would argue that the advantages outweigh the disadvantages. For a start note that you don't have to form a limited liability company if you want to set up a firm. You could, for example, form a partnership, but most people don't. So the corporation wins out in the (competitive) market for ownership form. This I assume is because the corporation offers more to people that other forms of organisational form. Is it morally defensible to deny people an organisational form they see as advantageous?

In addition note that countries that did not utilise the corporation until recently suffered because of it. For example, see chapter 6 of Kuran (2011) for a discussion of the consequences of a lack of the corporation in Islamic law. Is it morally defensible to deny people the advantages of development?

Not all people love the corporation, Adam Smith is famous for being being against it, except for a few noticeable large capital cases such as banking, insurance, water supply and construction of aqueducts and canals. If you don't use a limited liability firm how do you amass large amounts of capital? One reason for Smith's opposition to the corporation was moral hazard, the managers of the firm may not act in the interests of the firm's owners. Also given limited liability owners only risk a part of their wealth in any given firm so may not monitor management was well as they would if their whole wealth was involved. Such issues have, to a degree at least, been overcome by developments in corporate governance that Smith had no way of knowing. See Fleckner (2016) for more.

Fleckner's abstract reads:

In 1784, Adam Smith released the third and definitive edition of the Wealth of Nations, the most influential work in economics ever written. Of the eighty pages he added, more than thirty deal with “joint stock companies” and other commercial organizations. While these additions caused many observers to praise Smith as the first to coin the governance problems in firms, a closer examination of his remarks reveals that Smith’s theory of the firm, or the lack thereof, is in fact one of his work’s weaker parts. Smith thought history had shown that joint stock companies cannot compete with smaller firms, attributed this fact to certain organizational deficits, and concluded that joint stock companies should be established only under rare circumstances. Yet, in the following decades, exactly the opposite came to pass, with joint stock companies thriving in almost all fields and markets today. What made Smith so pessimistic about the joint stock company? The answer lies, this paper argues, in the sources Smith consulted, the companies he studied, and the general beliefs he held. Why did Smith’s pessimism turn out to be wrong? Smith probably overestimated the joint stock company’s weaknesses and underestimated developments that helped overcome them, such as technological progress, organizational innovations, and regulatory responses.

Also limited liability may not be as important to the corporation as many people think. As Henry Hansmann and Reinier Kraakman have written,

In essence, we argue that the essential role of all forms of organizational law is to provide for the creation of a pattern of creditors' rights-a form of  "asset partitioning" - that could not practicably be established otherwise. One aspect of this asset partitioning is the delimitation of the extent to which creditors of an entity can have recourse against the personal assets of the owners or other beneficiaries of the entity. But this function of organizational law which includes the limited liability that is a familiar characteristic of most corporate entities is, we argue, of distinct!y secondary importance. The truly essential aspect of asset partitioning is, in effect, the reverse of limited liability namely, the shielding of the assets of the entity from claims of the creditors of the entity's owners or managers. This means that organizational law is much more important as property law than as contract law. Surprisingly, this crucial function of organizational law has rarely been the explicit focus of commentary or analysis (Hansman and Kraakman 2000: 390, emphasis added).

Ultimately I don't really see the use of the limited liability corporation as a matter of morals, its more a practical matter, can we more easily achieve ours goals using the corporation than by using other organisational forms?

Refs.

• Fleckner, Andreas Martin (2016). 'Adam Smith on the Joint Stock Company', Max Planck Institute for Tax Law and Public Finance Working Paper, 1 January 2016.
• Hansmann, Henry and Reinier Kraakman (2000). `The Essential Role of Organizational Law', Yale Law Journal, 110(3) December: 387–440.
• Kuran, Timur (2011). The Long Divergence: How Islamic Law Held Back the Middle East, Princeton: Princeton University Press.

A brief prehistory of the theory of the firm 2

This is the latest version of the paper and is likely the last version. I can't be bothered making any more corrections or additions to it, so all remaining errors will remain.

A brief prehistory of the theory of the firm by Paul Walker on Scribd

Losing one’s wits over the trade deficit

At the Cafe Hayek blog Don Boudreaux has been writing wise words to the Wall Street Journal about trade deficits. Boudreaux writes in response to a letter written by Clyde Prestowitz in defense of Peter Navarro’s views on the trade deficit,

First, Prestowitz insists that trade deficits are debts that must be “repaid.” Not so. For example, most of the nearly $7 billion that BMW invested over the past quarter century in its Greer, SC, operations is part of America’s trade deficit, yet none of this investment is debt. It’s equity. Americans are not obliged to repay one cent of these funds.

It’s true that BMW’s owners, as Prestowitz correctly says about investors generally, “expect a return on their investment.” But no equity investors, foreign or domestic, receive returns unless they use their equity productively – that is, unless their equity is used to produce value that would otherwise not exist. Therefore, any returns received by successful foreign equity investors are created by these investors’ own vision, efforts, and risk-taking. Contrary to Prestowitz’s implication, these returns are not resources taken from Americans, for these returns would not exist absent the particular productive uses to which the foreign investments are put.

This misunderstanding is repeated when Prestowitz writes that “At least some of that return is repatriated to the home countries of the investors…. That repatriation constitutes a net outflow of wealth.” Again, the wealth to which Prestowitz refers is created by the foreign investors. It may “flow” out of the U.S., but it exists in the first place only because of the entrepreneurial vision and risk-taking of the foreign investors who earn it.

The second example of Prestowitz’s error arises from his failure to understand what happens when foreigners “repatriate” wealth earned in America. Returns on investments in America are earned in dollars. When BMW repatriates its U.S. returns to Germany, it converts those dollars into euros – and the sellers of euros who accept BMW’s dollars will either spend or invest those dollars in the U.S. Prestowitz’s is mistaken to suggest that repatriation of foreign returns causes a leakage of demand from the U.S. economy.

Both points made by Boudreaux are important, but the second is one I have made several time on this blog (eg here) since it is an idea many people seem to get wrong. Dollars do not leave a country. For example, the only place New Zealand dollars are useful is in New Zealand so if someone takes profits "out of New Zealand" the only way they can do so is by selling those dollars. The only place the buyer of those dollars can use them is New Zealand.

The phone at the end of the world

From NPR's Plant Money comes this audio on

Some of this story may sound familiar. Some of it may sound downright bizarre.

In the late 2000s, Argentina was facing a slew of economic problems. The president was a charismatic populist with bold plans and the will to act. One of the things then-President Cristina Kirchner wanted to tackle: unemployment. So she set out to create manufacturing jobs in Argentina.

She made a rule in 2010 that if a company wanted to sell things in Argentina, they needed to make things in Argentina.

Some companies didn't play ball. Even though Argentina was a big and lucrative market, Apple said, 'we'll just sit this one out, we just won't sell iPhones in Argentina at all.' Other companies, though, decided to give it a try — to set up entirely new production operations within Argentina. One of them was the company that made Blackberry, the most popular phone in the country at the time. Making the high tech phones would mean good jobs for thousands of people.

President Kirchner didn't just demand the phones were made in Argentina. She wanted the phones made in a very particular place in Argentina, all the way at the southernmost tip of the country. The government decided that is where she said the jobs should be created.

Tierra del Fuego is home to penguins, grey skies and brutal winds. It's the last stop for ships before making the final leg to Antarctica.

Today on the show, how a town at the ends of the earth wound up making Blackberry phones, and what happened to when a charismatic president launched a big plan to create jobs and boost manufacturing.

Five lessons for urban policy

Professor Ed Glaeser outlines five key lessons for policymakers in developing countries who want to implement effective urban policies. These ideas are part of the IGC's 'Cities that Work' initiative.

Mercantilism and Fascism

Currently we see a growth in mercantilist type ideas with regard to trade policy and, some would claim, a growth in fascist ideas. Is there a connection? Just how closely related are mercantilism and fascism?

A paper published in the journal History of Economic Ideas (vol. 6, no. 2, 1998, pp. 97-122) looks at this question. Patrick J. Welch wrote on "Mercantilism and Fascism".

The abstract reads,

Parallels are drawn along several lines to support the argument that fascism is the closest 20th Century counterpart to mercantilism. The paper is divided into three sections. In the first, mercantilism and fascism are compared in terms of timing, empires, and problems of conceptualization. In the second are compared objectives relating to power and plenty, and tenets concerning trade and precious metals, wages and population mobility, and the place of the state and individual. In the final section are compared practices of mercantilism and fascism as they relate to the implementation of regulation, the role of business interests in regulation, and warfare.

Welch's conclusion includes

Such was not a concern for the 20th Century fascist regimes in Germany and Italy. Like mercantilism from the earlier time, their primary focus, without apology to the citizens, was on the wealth and power of the state.

The parallel between modern neomercantilism and mercantilism is limited largely to the place of government in, and objectives of, trade policy. Many more parallels can arguably be drawn between fascism and mercantilism. The timing of both with reference to the formation of the national state was similar. Empire was important in both mercantilism and fascism, although the short life of the fascist regimes did not offer enough time to realize territorial ambitions. The concepts of both mercantilism and fascism were criticized for being more pragmatic than founded on rigorous principles, of questionable use in describing specific situations, and carrying offensive implications. Relative power and unification were important in both mercantilism and fascism, and the relationship of power and plenty in its role in unification was in dispute in both cases. Mercantilism and fascism shared comparable tenets on trade policies and bullionism, low wage and migration policies, and the dominant role of the state and subordinated role of the individual. Finally, regulation was extensive and the business community appeared to be a beneficiary of regulation under both systems, and warfare ranked high among the priorities of both systems.

So the question is, just how close is what we see happening today to the mercantilism of old? In terms of trade policy, much of recent US policy could be considered mercantilism, or at least neomercantilism, and you could argue that the power of the state and the role of national state - "make America great again" - is important to the pragmatic policies we see being put in place. It's not clear there are any underlying principles driving policy in the US right now. And the dominant role of the state implies a subordinate role for the individual. Much of the industrial policy being put in place is more pro-business - at least for some business - than pro-market.

May be there are two questions

From an article by Eric Crampton at newsroom,

When I lectured at the University of Canterbury, Associate Professor Seamus Hogan wanted to set an honours project asking a student to work out whether there really were any economic questions to which an economic impact assessment could provide a plausible answer.

I would argue that there are two possible questions. The first question would be, What do economic consultants do get money to stay in business, while the second would be, How do we get a really big impressive sounding number to try to influence policy in a way we want.

I'm guessing the second answer is the motivation behind most studies and in many cases they work since the public is not critical enough of the results of such work. Which is why people should read Eric's article. to help develop a good BS detector.

If you were to ask the question, What economically meaningful question would an economic impact assessment provide a plausible answer to, then I think you have a problem. Its not clear there is an answer to it.

Andrew Gelman on social science, small samples, and the garden of the forking paths

Statistical significance, especially in small samples, is a problem in all empirical social science, including economics. Here statistician, blogger, and author Andrew Gelman of Columbia University talks with EconTalk host Russ Roberts about the challenges facing psychologists and economists when using small samples.

On the surface, finding statistically significant results in a small sample would seem to be extremely impressive and would make one even more confident that a larger sample would find even stronger evidence. Yet, larger samples often fail to lead to replication. Gelman discusses how this phenomenon is rooted in the incentives built into human nature and the publication process. The conversation closes with a general discussion of the nature of empirical work in the social sciences.

A direct link to the audio is available here.

If economic ignorance were a natural resource, our world would be paradise

You have to love a heading like that! It comes not from me but from the ever insightful Don Boudreaux at the Cafe Hayek blog. Boudreaux is commenting on the idea that the government subsidisation of low-skilled workers’ "housing, food, medical care, and transportation" enables employers of such workers to pay them less than some "true value" of their work.

There is an obvious question as to what this "true value' is.

Boudreaux writes,

The central economic point is this: the welfare programs to which Mr. Phelps alludes (with the possible exception of transportation subsidies) reduce the supply of labor and, thus, push wages up. Far from employers being subsidized by such welfare programs, employers of workers who receive these government benefits are obliged, as a result, to pay wages that are made artificially high.

But to show just how deeply confused this Mr. Phelps is, let’s pretend that he’s correct to insist that welfare programs artificially reduce wages. Mr. Phelps then asserts that “Failure to pay a living wage gives consumers artificially low prices and increases corporate profits.” Because nearly all employers of low-skilled workers operate in intensely competitive industries such as retail and food service, workers’ artificially low wages would indeed result in artificially low prices for consumer goods, but not in increased corporate profits. The ability to hire workers at artificially low wages would attract new entrants into these markets, as well as cause existing firms to expand their outputs, until the rate of profit earned by employers of these workers is no higher than it would be if wages were higher. That Mr. Phelps is oblivious to this reality is sufficient reason to dismiss his economic analysis.

While I agree with Boudreaux's point, I do wonder just how large the effect is. Of all the things the government does to stuff-up the labour market is this a big player?

More on "Navarroism"

Peter Navarro's very strange views on trade have been attacked by many economists, from all parts of the political spectrum, recently. Diego Zuluaga offers some empirical background to the attacks on Navarro at the IEA's blog.

Here I intend to give some empirical texture to the rebuttal, by showing the relationship between current account deficits – the number that Navarro thinks we should be worried about – and growth rates – which Navarro claims would increase if the U.S. cut said deficits – in four representative countries.

The four charts below depict current account deficits and growth for the U.S., Mexico, the UK and Germany, from left to right and top to bottom. The reason I picked those countries is that they are the most likely to be mentioned in present discussions around trade. Furthermore, the UK is often said to suffer from a chronic current account deficit, whilst Germany is increasingly chastised for its large current account surplus which is alleged to benefit her at the expense of other Eurozone economies.

A number of observations can be made in light of the data above. Firstly, rather than there being a negative relationship between current account deficits and growth rates, the arrow seems to point in the opposite direction: the larger the deficit, the higher the growth rate. This should not come as a surprise. The healthier an economy, the more likely households are to spend and businesses to invest, using both domestic and foreign goods and services in the process. Moreover, a growing economy attracts foreign capital and, since the current account balance is always matched by a balance with the opposite sign on the capital account, this means that, the more foreigners invest in a country, the more that country will import in goods and services.

Secondly, current account deficits (surpluses) are not associated with consistently low (high) rates of GDP growth. The U.S. recorded periods of high growth at a time when its current account deficit was increasing, whilst German GDP has grown only modestly in the aftermath of the sovereign debt crisis in Europe, even as its current account surplus burgeoned. Thirdly, and perhaps most surprisingly, Trump’s nemesis in the form of the U.S.’s southern neighbour has itself been running persistent current account deficits over most of the period recorded by the OECD (where the figures come from). Given Trump’s rhetoric depicting Mexico as living at the expense of the U.S. worker, this may come as a shock, but when we consider that the country has seen record foreign investment inflows since the mid-2000s – indeed, since the entry into force of NAFTA in 1994 – it is only natural that the current account deficit would widen commensurately.

We can conclude that the historical record suggests that the relationship between deficits in traded goods and services, and the growth rate of the U.S. economy is almost exactly the opposite of the one Navarro tries to defend.

What do we gain from this?

From Stuff comes this bit of news:

A city council committee is advancing plans to create a "Christchurch dollar" and wants a meeting with regulators about the concept.

Te Hononga Council – Papatipu Runanga Committee is interested in a community currency for Canterbury and the Treasury and Reserve Bank have been approached about the concept.

The committee is focusing on the Bristol Pound as a potential model. It was introduced in Britain in 2012 and can be spent in Bristol and the County of Avon.

What I ask would we gain if this idea actually was carried out?

"It is ultimately is boosting local economy by creating currency that circulates just within that economy . . . it basically means people are buying and selling within the same place," he said.

"The general studies show that it decreases leakage out of an economy, but it increases the basic economic activity, but at a local level.

So this is another form of the idiot "buy local" idea?

While the idea is doable its not clear that there are any large benefits from it. And if the Christchurch City Council really thinks this the most important thing to deal with in Christchurch right now then they have lost the plot big time!

An interesting question is, Will the government accept Christchurch dollars in payment of taxes? If not then people will have to hold New Zealand dollars anyway and as these dollars do everything the Christchurch dollars would do and buy stuff from other regions of New Zealand and can pay taxes, what if the point of Christchurch dollars? Using New Zealand dollars dominates using Christchurch dollars. Christchurch dollars only seem to increase transaction costs (if only a bit), so what's the point.

The rise of Trump, fascism and the alt-right with Jeffrey Tucker

Jeff Berwick interviews Jeffrey Tucker (Director of Content for the Foundation for Economic Education), topics include: Jeff Tucker's report on Anarchapulco, the 'alt-right' and fascism, authoritarianism, Mises was the leading opponent of Marxism, collectivism, Hegel's criticism of economic freedom and total statism, Thomas Carlyle and the movement against free markets, Darwin and disgenics, Madison Grant and the eugenics movement, Spengler's Decline of the West, Carl Schmidt, the failure of government, growing fascism in the US, biometric exit scans at airports, tyranny only held in check by financial constraints, knowing when to leave the empire, the harsh reality of Trump, Trump's economic tomfoolery, Elizabeth Warren, changing the world, who is Satoshi Nakamoto?

Economic action beyond the extent of the market by Per Bylund

The Murray N. Rothbard Memorial Lecture 2017, sponsored by Helio Beltrão, by Per Bylund. Bylund is an assistant professor of entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 11 March 2017.

Corporations are evil

Or are they?

But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, last month, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.

The above quote is from John C. Coffee Jr (Adolf A. Berle Professor of Law and director of the Center on Corporate Governance at Columbia Law School) in an interview at the Pro-Market blog. The idea that firms can be defenders of human rights is not an idea that many of our anti-corporation, anti-capitalism, anti-globalisation, anti-free trade warriors have given much thought but it is an idea that deserves more attention than it gets.

No government cash for new Auckland stadium

Some good news is reported in the New Zealand Herald,

An Auckland central city stadium wouldn't get Government funding, Prime Minister Bill English says.

A stadium is back on the cards after Auckland Mayor Phil Goff commissioned work on the feasibility of a new central city site costing up to $1 billion.

This morning English said the Government's position remained the same - it would not put up any money towards a stadium.

"Our top priority right now is this billion-dollar housing infrastructure fund, which we're in intense negotiations with the council about right now. That's going to take all our attention and cash for a while," English told The Am Show.

"It hasn't been raised with us. It's not a high priority. We're not aiming to put money into it."

Given that all economic studies on stadiums show that they are white elephant such news will please economists, if not many non-economists. The view of economists is summarised by Dennis Coates and Brad R. Humphreys in their article Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?

This paper reviews the empirical literature assessing the effects of subsidies for professional sports franchises and facilities. The evidence reveals a great deal of consistency among economists doing research in this area. That evidence is that sports subsidies cannot be justified on the grounds of local economic development, income growth or job creation, those arguments most frequently used by subsidy advocates. The paper also relates survey evidence showing that economists in general oppose sports subsidies. In addition to reviewing the empirical literature, we describe the economic intuition that probably underlies the strong consensus among economists against sports subsidies.

Now if we could just encourage the Auckland council to follow central government's lead.

Dan Griswold on trade deficits

Strangely national income accounting is big news right now, at least insofar as it pertains to trade. Thanks to some very weird thinking on trade in the Trump administration trade deficits are all the rage. Not that they are well understood.

This lack of understanding has bought forth a new paper by Daniel Griswold on Plumbing America’s Balance of Trade (pdf) to help people get a handle on the issue of the trade deficit.

The abstract reads,

By focusing only on the trade deficit, critics miss the full economic benefits of a more open American economy. This paper provides original analysis of the total inflow and outflow of dollars through numerous “pipes” that make up the plumbing of US commerce with the rest of the world. It explains how underlying macroeconomic factors determine the size and direction of America’s trade balance, why bilateral deficits with trading partners do not indicate a failure of US trade policy, and why efforts to employ trade policy to fix the overall trade deficit or bilateral deficits would be futile and self-damaging. Among the key policy conclusions: America’s net positive inflow of capital year after year indicates the continuing attractiveness of the United States as a destination for foreign investment; imports benefit US consumers as well as producers; and direct foreign investment abroad by US companies is not primarily a platform for importing goods and services back to the United States but for expanding sales to foreign customers.

P.J. O'Rourke on Trump, populism, and "How the Hell Did This Happen?"

In the latest Reason Podcast, O'Rourke tells Nick Gillespie what he learned about Donald Trump's appeal from his time spent covering the 2016 election, why populism is a "tragedy" for libertarians, and why he wants his kids to study English and the liberal arts at college. "Be immersed in the history of civilization, you know, in literature, in the arts," he says. "You're going to be force-marched through these things. Some of it's going to be boring. Some of it you won't appreciate for another 40 years, but it's that college liberal arts education, is the last chance you really get to [immerse yourself in art, music, and culture]."

Robert Whaples on the economics of Pope Francis

For those with an interest in the economics of religion here is an interview with Robert Whaples in which he discusses the Economics of Pope Francis.

Is capitalism part of the poverty problem facing the world or part of the solution? Are human beings doing a good job preserving the earth for future generations? To improve the world, should we improve capitalism or ourselves? Robert Whaples of Wake Forest University talks with EconTalk host Russ Roberts about "Laudato Si'," Pope Francis's encyclical on capitalism, poverty, and environmental issues.

A direct link to the audio.

Benefits of importing: Evidence from US firms’ global sourcing decisions

Globalisation is under threat, just think of the Trump administration's approach to trade policy. One thing they miss when attacking trade is the fact that US firms benefit significantly from increased import opportunities as they lower their costs and expand. Thus increased protectionism in the form of higher domestic tariffs would decrease these domestic firms’ competitiveness both at home and abroad.

In a recent column at VoxEU.org, Pol Antràs, Teresa Fort and Felix Tintelnot discuss research that brings a new perspective to the trade debate by focusing on a potentially positive effect of trade: namely, the opportunity for firms to access cheaper inputs from foreign suppliers. Distinguishing final good trade from firms’ input sourcing decisions is important, since intermediate inputs account for approximately two thirds of international trade and vertical specialisation across countries is an important and growing feature of the world economy.

Antràs, Fort and Tintelnot develop a framework for analysing global sourcing.

Our research provides a theoretical framework that can explain these results, and that can be used to quantify the aggregate implications of an improvement in the potential savings from Chinese imports. In our paper, we present a model with heterogeneous firms that self-select into importing based on their productivity and country-specific variables, such as wages, trade costs, and technology. Firms can, in principle, buy intermediate inputs from any country in the world. However, adding a country to the set of countries from which a firm is able to import requires incurring a market-specific fixed cost.

In this setting, it is difficult to determine the profit-maximising set of countries from which a firm will import. This is because the marginal benefit of adding a particular country depends on the other countries from which the firm imports. Sourcing decisions across countries are therefore interdependent, which affects whether improvements in one country (e.g. China) will lead firms that import from China to increase or decrease their sourcing from other countries.

Despite these complications, we show that, under an empirically relevant condition, selection into importing exhibits complementarities across source markets. More specifically, when demand is responsive to changes in price, or there is large dispersion of input productivities across locations, the addition of a country to a firm's portfolio of input sources necessarily increases the marginal gain from adding other locations. As a result, the model predicts that the number of countries from which a firm imports will be increasing in firm size, a prediction that holds in our US data, [ ... ]

We use the Census data to estimate the model and confirm that the condition guaranteeing complementarity in firms’ sourcing decisions is indeed satisfied in the data. Our estimates also imply that an average US firm sourcing from all 66 foreign countries in our sample faces around 9% lower input costs than a purely domestic firm, and consequently has sales that are approximately 32% larger. A firm at the 90th percentile of foreign sourcing intensity imports 47% of its input purchases, which implies cost savings of 30% and a 176% increase in its sales due to global sourcing.

We also use the model to analyse the implications of a positive ‘shock’ to the potential cost savings from China. In the ‘complements case’, the model predicts that firms that begin importing from a new country (such as China) will also increase their domestic and third-market sourcing. The results from the counterfactual analysis confirm this prediction, and are consistent with the reduced-form evidence on China importers described above. In contrast, non-China importers shrink in response to the shock, since they compete against the importers who now have lower costs.

Antràs, Fort and Tintelnot also look at the effects on consumers and workers.

Finally, our framework and estimation shed light on the impact of global sourcing on US consumers and workers. In our model and counterfactual analysis, China’s increased savings potential causes the US price index to fall 0.2%, as firms sourcing from China lower their prices. This reflects the fact that cheaper inputs allow some firms to lower their costs, thereby increasing the competitive environment in which all firms operate. This leads importing firms to expand, while the less productive firms that cannot take advantage of the China shock shrink. [ ... ] Firms at the top of the distribution grow, while medium and small firms that are not sufficiently productive to import from China shrink or exit altogether. Our framework thus predicts that global sourcing magnifies pre-existing differences in underlying firm productivity and increases the skewness in the size distribution of firms. Although this reallocation will entail displacement for some workers, consumers all enjoy lower prices and aggregate productivity grows.

When looking at the effects of input sourcing from China Antràs, Fort and Tintelnot write,

In line with previous work, we document the impact of changes in imports from China from 1997 to 2007. Using firm-level US Census data on production and imports, we show that US manufacturers that grew their imports from China also grew their domestic sourcing, their sourcing from third markets, and the number of countries from which they import. These results are surprising, since one might have expected imports sourced from China to displace inputs made elsewhere. In contrast, the data suggest that savings from China allow firms to grow sufficiently so that they also use more third-market and domestic inputs. Since domestic inputs require labour to produce, the results imply that importers increase the demand for US workers used in their firm and/or by their suppliers.

We also estimate the causal impact of changes in US manufacturers’ Chinese imports on domestic and third-market sourcing. To do so, we exploit the significant productivity growth within China and its accession to the WTO in 2001 to construct a firm-specific, exogenous shock to the potential savings from Chinese imports. In the spirit of Autor et al. (2013) and Hummels et al. (2014), we instrument for changes in US firms’ imports from China using changes in Chinese export shares to other high-income countries in a firm’s 1997 input industries. To distinguish the role of sourcing from import competition, we also include specifications in which we control for changes in import penetration from China in a firm’s output industry, and in which we instrument for changes in import penetration using a shock to Chinese potential in a firm’s output industry. Across all specifications, we find that firms that increase their Chinese imports also grow their domestic sourcing, sourcing from third markets, and the number of countries from which they import. In contrast, increased import competition generally has a negative impact on these outcomes.

Implications for trade policy?

There is mounting evidence that there are winners and losers from trade. While the theory in our paper is consistent with these findings, our work also points to a big potential cost of addressing these distributional consequences by limiting trade. In particular, it is clear that some US firms benefit significantly from increased import opportunities as they lower their costs and expand. Even if trade partners do not retaliate in response to increased protectionism, higher domestic tariffs would decrease these domestic firms’ competitiveness both at home and abroad. This represents a potentially significant drawback of protectionism that should not be ignored in the current debate about the costs and benefits of globalisation.

Marriage, kids, and the wage gap

The career dynamics of the gender gap for graduates of the Chicago Business School, as studied by Bertrand, Goldin, and Katz (2010), illustrate a common pattern. While women and men start their careers with similar earnings, a substantial gap arises over time, and the arrival of children is a major concurrent factor in the rising earnings gap. At least in this highly (and homogeneously) educated population, only a small share of the gender gap is due to premarket factors such as training and coursework; instead, family formation sets the gap in motion.

In short, kids are bad for the income of women. The above quote comes from Specialization Then and Now: Marriage, Children, and the Gender Earnings Gap across Cohorts by Chinhui Juhn and Kristin McCue, Journal of Economic Perspectives—Volume 31, Number 1—Winter 2017—Pages 183–204.

The conclusion of the paper reads, in part:

Given women’s gains in the labor market, Becker’s (1981) seminal model predicts that patterns of specialization should become less gendered. It predicts that the gender earnings gap associated with marriage should fall, and it has. However, the gender earnings gap associated with children has been more persistent, and the proportion of the remaining gender earnings gap associated with children has risen.

The persistent nature of the motherhood gap—particularly among professional women poised for high-paying careers, and among women who have access to generous leave benefits and childcare subsidies—brings home the point that women still devote much more time to child-rearing over the course of their careers than do men with similar human capital characteristics. One set of explanations put forward revolve around social norms that are slow to change and resist economic forces (Fortin 2005; Bertrand 2011; Bertrand, Kamenica, and Pan 2015). Social norms can serve as both push or pull factors. On the pull side, women may still by-and-large identify themselves as the primary caretaker of children. On the push side, work places may still be governed by norms from an earlier era of male breadwinners with stay-at-home wives. According to this set of norms, an employee is a “good” employee only if he or she is married to the job and willing to work long hours. A number of papers have shown that the gender gap is particularly large in jobs that require long hours (Goldin 2014; Gicheva 2013; Cha and Wheeden 2014; Cortes and Pan 2016) (Emphasis added.)

As an example of this consider some recent research that suggests women earn, on average, around 31% less that men in STEM (Science, Technology, Engineering or Mathematics) subjects after gaining a PhD.

The obvious question is why.

Perhaps surprisingly the answer to this questions can be reduced to just two factors: 1) field of study and 2) kids.

But after controlling for differences in academic field, the pay gap between males and females is reduced to around 11% in first-year earnings. There is a tendency for women to graduate in less-lucrative academic fields - such as biology and chemistry than comparatively industry-friendly fields, such as engineering and mathematics.

This 11% difference can be explained by the finding that married women with children earned less than men. Note that an unmarried, childless woman earned, on average, the same annual salary after receiving her doctorate as a man with a PhD in the same field.

These results come from a paper, "STEM Training and Early Career Outcomes of Female and Male Graduate Students: Evidence from UMETRICS Data Linked to the 2010 Census" by Catherine Buffington, Benjamin Cerf, Christina Jones and Bruce A. Weinberg published in the American Economic Review: Papers & Proceedings 2016, 106(5): 333–338.

This would suggest that if you are studying the pay gap between men and women two things to take into account are hours worked and time off for kids.

End the federal prohibition on marijuana

From the Cato Institute comes this Cato Daily Podcast in which Rep. Thomas Garrett (R-VA) talks to Caleb O. Brown about the enforcement of federal marijuana laws,

As long as the feds refuse to enforce marijuana laws uniformly across the United States, Rep. Thomas Garrett (R-VA) says it’s time to end federal cannabis prohibition.

An empirical analysis of mergers

Are mergers between firms always the great evil that some people would have us believe? A recent working paper by Celine Bonnet and Jan Philip Schain suggests may be not.

The paper is An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices. Its abstract reads,

In this article, we extend the literature on merger simulation models by incorporating its potential synergy gains into structural econometric analysis. We present a three-step integrated approach. We estimate a structural demand and supply model, as in Bonnet and Dubois (2010). This model allows us to recover the marginal cost of each differentiated product. Then we estimate potential efficiency gains using the Data
Envelopment Analysis approach of Bogetoft and Wang (2005), and some assumptions about exogenous cost shifters. In the last step, we simulate the new price equilibrium post merger taking into account synergy gains, and derive price and welfare effects. We use a home scan data set of dairy dessert purchases in France, and show that for two of the three mergers considered, synergy gains could offset the upward pressure on prices post. Some mergers could then be considered as not harmful for consumers.

A dialogue on Israel Kirzner and his contributions to price theory and the competitive market process

From Peter Boettke at the Coordination Problem blog comes this bit of good news,

Liberty Matters this month features an essay by me on Kirzner with commentary by Mario Rizzo, Peter Klein, and Frederic Sautet. Please join the conversation once it opens to the public in a week or so.

Well worth taking the time to read.

Larry White on India’s demonetization and Austrian macroeconomics

From David Beckworth’s new podcast series, Macro Musings comes this audio of an interview with Larry White,

Larry White is a professor of economics at George Mason University and has written widely on monetary theory, free banking, and the Austrian School of Economics. Today, he joins the show to discuss the recent demonetization efforts in India to crack down on corruption. White argues that India’s efforts to end the circulation of large notes and begin the circulation of new notes is having pernicious effects on the Indian population. He and David also discuss Austrian Business Cycle Theory, how this theory was developed by great economists such as Ludwig von Mises, and how the theory may have played a role in the lead up to the Great Recession.

Mark Koyama on the macroeconomics of ancient Rome

From David Beckworth’s new podcast series, Macro Musings comes this audio of an interview with Mark Koyama

Mark Koyama is an Assistant Professor of Economics at George Mason University and a Senior Fellow at George Mason University’s Mercatus Center. He joins the show to discuss his research on the economic history of ancient Rome from the rise of the Roman Republic to the transition to the Roman Empire to the Empire’s eventual fall.

Navarro on the trade deficit (updated)

As bizarre as this sounds Peter Navarro, Trump's main trade adviser - Navarro is director of the White House National Trade Council, has written in an article in the Wall Street Journal that

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports). Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

Now as a matter of national income accounting this is just plan wrong, as any Econ101 student will be able to tell you. Let us ignore the economics of it for now.

The national income identity that Navarro is using is GDP=C+I+G+NX, where C is consumption, I is investment, G is government spending and NX is net exports which equals exports (X) minus imports (M) so we can write GDP=C+I+G+X-M. Now looking at that equation its looks like reducing M will increase GDP, but this is not so. Why?

To see why think about C. When we consume we consume both New Zealand made goods and foreign made goods, so C includes some imports. The same is true for I and G, both these include a component of imports. But as we are interested Gross Domestic Product we only want to include the New Zealand component of C, I and G, so we minus off imports at the end to remove the foreign components of C, I and G, leaving us with only the New Zealand component. That is, if we don't subtract M in the national income identity, we would overstate our GDP by the value of our imports.

Now think about what happens if we reduce imports and thus increase net exports. We reduce M, which makes it look as though GDP will go up but we also reduce the foreign component of C, I and G by exactly the same amount and thus nothing happens to GDP.

What if net exports could be increased by increasing exports via "smart negotiations"? (Whatever that means.) This would reduce the trade balance and thus the size of any current account deficit. But as the balance of payments must be zero a decrease in a current account deficit also means a decrease in the capital account surplus. There has to be a capital account surplus to get the balance of payments to be zero given a current account deficit. But this reduction the capital account means there is less investment and consumption taking place in the economy. A capital inflow lowers the interest rate and thus simulates domestic investment and consumption A smaller current account means a smaller capital account which implies higher interest rates meaning less investment. So if we could somehow increase X we would decrease I and C.

So again it's not clear GDP goes up.

When you start thinking about economics of reducing imports or increasing exports things get even worse but the national income accounting view of Navarro's statement alone should have you wondering about the standard of thinking on trade in the Trump administration.

Update: Don Boudreaux comments on the Navarro piece here, Tim Worstall comments here, Daniel Ikenson comments here, Phil Levy comments here, Richard A. Epstein comments here and Linette Lopez comments here.

Buchholz on Abraham Lincoln on tariffs

Daniel Pearson writes in The Hill,

In his address to a joint session of Congress this week, President Trump quoted President Lincoln’s views on international trade: “The first Republican President, Abraham Lincoln, warned that the ‘abandonment of the protective policy by the American government [will] produce want and ruin among our people.’ Lincoln was right.”

Ten years before, Todd Buchholz had written the answer to Trump,

Abraham Lincoln put one protectionist argument pithily: "I don't know much about the tariff, but I do know if I buy a coat in America, I have the coat and America has the money--if I buy a coat in England, I have the coat and England has the money." He was right--he did not know much about the tariff (Buchholz 2007: 76).

And, it is clear, Trumps doesn't know much about the tariff either. Pearson continues,

Lincoln likely saw Adam Smith’s “invisible hand” of the marketplace to be doing a fine job of allocating resources within the United States, so may not have perceived much additional benefit from allowing it to work across national borders. He likely never contemplated David Ricardo’s concept of “comparative advantage,” which explains that neither individuals nor nations should seek self-sufficiency, because not everyone or every country can do everything well. The better approach is for people to specialize in activities at which they are most productive, then trade to obtain other needed goods and services.

and

Lincoln was a thoughtful man. If he was alive today, his views on trade likely would have evolved to reflect the economic experience of the intervening years. Perhaps he would even support the position articulated by another great Republican president, Ronald Reagan, in his 1983 State of the Union address: “As the leader of the West and as a country that has become great and rich because of economic freedom, America must be an unrelenting advocate of free trade.”

In short, self-sufficiency leads to poverty, trade to wealth. Trump's anti-trade agenda will make Americans poor, not great.

Ref.

• Buchholz, Todd G. (2007). New Ideas from Dead Economists: An Introduction to Modern Economic Thought, Completely Revised and Updated, New York: Plume.

A structural model of the retail market for illicit drugs

An interesting new paper on A Structural Model of the Retail Market for Illicit Drugs by Manolis Galenianos and Alessandro Gavazza, has appeared in the American Economic Review, March 2017, Vol. 107, No. 3: Pages 858-896.

The abstract reads,

We estimate a model of illicit drugs markets using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers' relative profitability of targeting loyal buyers versus first-time buyers.

So one advantage of legalising drugs would be an increase in the quality of drugs sold and a reduction if the range of quality in the market with low quality drugs being driven from the market due to more information on quality being available before  purchase. This has a obvious advantage when you consider the effects of low quality drugs on users.

But like with most repugnant markets people - and politicians - will react on emotion rather than evidence and so the war on drugs will continue to be fought and lost.

Feds should focus on privatisation over new infrastructure spending

From the Cato Institute comes this Cato Daily Podcast in which the Cato Institute's Chris Edwards talks to Caleb O. Brown and argues that President Trump’s massive centrally planned infrastructure proposal misses the mark. Edwards argues that Trump should focus on devolving control of assets and privatize many currently public infrastructure projects.

Firm outcomes and local migrant worker supply

Immigration ,and its effects on labour markets, is a hot topic these days. While there have been numerous studies exploring how immigration affects local labour markets, there is much less evidence on the impact of immigrants on firms’ productivity levels. Productivity being important for things like wages in firms. A new column, written by Cristina Mitaritonna, Gianluca Orefice and Giovanni Peri, at VoxEU.org uses detailed, firm-level data from France, to explore how firms react to an increase in the supply of immigrant workers. It finds that provinces that has a large increase in immigrant supply experienced higher productivity growth, especially among firms that were initially less productive. This suggests immigration can promote convergence in firm size and productivity levels.

The productivity effects of immigrates,

A 10% increase in the supply of immigrant workers in the province implies 1.7 and 2.7 log-points increase in the TFP and in the domestic market share of the average firm, respectively. But firms’ heterogeneity matters – initially less productive and smaller firms benefit more from increases in the migrant labour supply. For firms with TFP initially below the median, a 10% increase in the local supply of immigrants implies increases of 3.6 and 8.2 log-points in TFP and domestic market share, respectively. Similarly, for firms with initial employment below the median, a 10% increase in the local supply of immigrants is associated with increases of 2.9 and 8.8 log-points in TFP and domestic market share, respectively.

One of the more controversial aspects of immigration is the employment/wage effect of an increase in immigrants

Finally, higher productivity, higher investment in physical capital, and lower exit probability should help native workers in affected firms. While immigrants may in part compete with natives for jobs, the effects described above will help existing workers, especially those in initially less-productive firms. Using the same empirical strategy, we show that an increase in the immigrant share in the province has a positive effect on the average wage of natives in the firm – a 10% increase in immigrants is associated with a five log-point increase in native wages in the average firm. This effect is slightly smaller (but still positive) for firms with low initial productivity or small initial size. Mobility and selection of native workers across firms, in response to immigrants, may explain this result – while firms with initially low TFP attract highly skilled immigrants (who in turn increase their productivity), highly skilled native workers move to firms that do not hire immigrants (those with initially high TFP). This composition effect explains why the average wage of native workers increases more in firms with smaller increase in immigrant workers (i.e. initially less-productive firms).

The mobility of highly skilled native workers towards firms that hire fewer immigrants may be an important channel of positive spillovers within a province. Firms that do not hire immigrants may experience part of the benefit via an increase in their set of skilled employees.

In summary,

The immigration of highly skilled workers to France over the period 1995-2006 promoted some convergence in size and productivity levels across firms. Provinces with a large increase in immigrant supply experienced higher productivity growth of firms that were initially less productive. We find that this may be due to the fact that smaller, less productive firms were more likely to hire immigrants in order to cut costs and/or adopt new technologies, improve efficiency, and invest in capital and methods that complement the skills of immigrants. This is an interesting and previously unexplored, effect of immigration on local economies.

Is state-ownership detrimental to firm performance? New Zealand evidence

The evidence on the relationship between state-ownership and performance across the globe is mixed, so what does the New Zealand experience have to say on the issue? A forthcoming paper - New Zealand State-owned enterprises: is state-ownership detrimental to firm performance? by Kenny Ka Yin Chan, Li Chen and Norman Wong - in New Zealand Economic Papers looks at the New Zealand situation.

The abstract reads,

This study examines the performance of State-owned enterprises by conducting a contemporary examination in the New Zealand environment. Applying both a cross-sectional and time-series approach, we document significant and consistent evidence that state ownership is negatively associated with firm profitability compared to private ownership. We also find evidence suggesting that state ownership is positively associated with asset turnover and labour intensity, but not associated with labour turnover. This implies that SOEs on average experience a higher asset turnover due to excessive labour employment, compared to private firms.

The paper's conclusion states,

We investigate the relationship between state-ownership and firm performance from two perspectives. Cross-sectional comparisons examine the hypothesis of whether SOEs inherently perform worse than private firms, while time-series analyses test whether performance improves after privatisation. We find consistent results between the cross-sectional and time-series analyses.

The cross-sectional evidence suggests a significant negative association between state ownership and firm profitability, in line with prior research. We do not find a significant relation between state ownership and labour turnover. However, we find SOEs are more efficient in utilising operating assets to generate revenues but are less efficient in terms of labour employment compared to private firms. Consistently, time-series results from industry-adjusted models reveal significant improvements in profitability, as well as declines in both asset turnover and labour intensity after privatisation. Given the lack of compelling evidence on labour turnover, SOEs’ superior efficiency in ATO appears to come at the expenses of excessive labour employment.

The results contribute insights to academia and policy-makers that may be useful. Prior literature has generally only considered performance differences from either a cross-sectional or time-series perspective, so by examining both angles together, our study provides a more holistic view of the issue. Additionally, this study adds to an emerging line of country-level studies (e.g. Ejelly (2009) on Saudi Arabia; Nahadi and Suzuki (2012) on Indonesia; Lau and Tong (2008) on Malaysia), by examining New Zealand privatisations. Given the National government’s campaign of a mixed-ownership model, empirical evidence of the effects of privatisation becomes vital. Importantly, given that both the cross-sectional and time-series evidence finds a positive relationship between private-ownership and firm profitability, the regime to privatise SOEs is not only a method of raising government funds but also a superior form of commercial management.

Overall, this study addresses an apparent gap in the New Zealand literature regarding the performance effects of state- versus private-ownership. This insight is becoming increasingly important in the near future, as the National government continues their regime of partially privatising the major SOEs.

One thing that is worth mentioning is that privatisation should not be seen as a way of "raising government funds". If you really want to raise money then you would just sell monopolies and that would do nothing for the economy. The advantages of privatisation come from increased efficiency and increased competition but efficient firms in competitive markets sell for less than monopolies, so raising fund should be well down the list of priorities. Also, as I have argued before it can be reasonably argued that the practice of selling less than 51% of an SOE does not constitute privatisation. Under such a plan, the state remains the primary force responsible for deciding the outputs (and possibly the inputs) of the firm, rather than the market. This means that programmes such as the recent policy by the New Zealand government of selling just 49% of an SOE is not genuine privatisation. This policy means that, in practice, little will change in terms of the behaviour of the SOEs: they will remain, for all intents and purposes, government-controlled entities. This contradicts the very reason for privatising SOEs in the first place. Evidence on the difference in performance between fully and partially privatised firms would be interesting.

Chinese imports, and US manufacturing employment

What is the relationship between Chinese imports and employment in US manufacturing? In the past some empirical work has argued that the relationship is negative. But a new working paper argues against this idea.

The abstract of the paper, Firm Reorganization, Chinese Imports, and US Manufacturing Employment (pdf) by Ildiko Magyari, reads,

What is the impact of Chinese imports on employment of US manufacturing firms? Previous papers have found a negative effect of Chinese imports on employment in US manufacturing establishments, industries, and regions. However, I show theoretically and empirically that the impact of offshoring on firms, which can be thought of as collections of establishments - differs from the impact on individual establishments - because offshoring reduces costs at the firm level. These cost reductions can result in firms expanding their total manufacturing employment in industries in which the US has a comparative advantage relative to China, even as specific establishments within the firm shrink. Using novel data on firms from the US Census Bureau, I show that the data support this view: US firms expanded manufacturing employment as reorganization toward less exposed industries in response to increased Chinese imports in US output and input markets allowed them to reduce the cost of production. More exposed firms expanded employment by 2 percent more per year as they hired more (i) production workers in manufacturing, whom they paid higher wages, and (ii) in services complementary to high-skilled and high-tech manufacturing, such as R&D, design, engineering, and headquarters services. In other words, although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms. Contrary to conventional wisdom, firms exposed to greater Chinese imports created more manufacturing and nonmanufacturing jobs than non-exposed firms.