Paul Walker

Dr Paul Walker is an economist at University of Canterbury. He has expertise in microeconomics, institutional economics and industrial Organization. He blogs for The Dismal Science.

Two interesting looking recent working papers - The Dismal Science

Aug 26, 2014

First a paper on Thomas Piketty's recent book:

The Rise and Fall of General Laws of Capitalism
Daron Acemogluy James A. Robinsonz

Thomas Piketty's recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating "general laws" to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty's book, such as the gap between the interest rate and the growth rate.
and then one on free banking and economic growth in Quebec:
Free Banking and Economic Growth in Lower Canada, 1817–1851
Mathieu Bedard and Vincent Geloso

Generally, the historical literature presents the period from 1817 to 1851 in Lower Canada (modern day Quebec) as one of negative economic growth. This period also coincides with the rise of free banking in the colony. In this paper we propose to study the effects of free banking on economic growth using theoretical and empirical validations to study the issue of whether or not economic growth was negative. First of all, using monetary identities, we propose that given the increase in the stock of money and the reduction in the general price level, there must have been a positive rate of economic growth during the period. We also provide complementary evidence drawn from wages that living standards were increasing. It was hence impossible for growth to have been negative. Secondly, we propose that the rise of privately issued paper money under free banking in the colony had the effect of mitigating the problem of the abundance of poor quality coins in circulation which resulted from legal tender legislation. It also had the effect of facilitating credit networks and exchange. We link this conclusion to the emergence of free banking which must have been an important contributing factor. Although we cannot perfectly quantity the effect of free banking on economic growth in Lower Canada, we can be certain that its effect on growth was clearly positive.

The damage done by subsidies - The Dismal Science

Aug 15, 2014

From the Economist magazine comes this piece on China'a subsidies to ship building. In 2006 China enacted a “Long and Medium-Term Plan” [read subsidies to shipyards] to enlarge its shipping industry by 2015.

Yet economists’ views on subsidies have hardened over time. China’s policy provides subsidies both for the construction of ships themselves and for the building or expansion of shipyards. These interferences can distort trade, resulting in inefficient production. In deciding whether a subsidy flouts trade rules the World Trade Organisation (WTO) uses a “price gap” approach. The idea is simple: if a country is producing and selling something at a big discount to what others are charging, there is probably something fishy going on.

Price gaps provide a quick warning system, but are a poor way to judge the full extent of subsidies, according to a 2013 book by Usha and George Haley, of West Virginia University and the University of New Haven. It is a static approach, ignoring how demand for each shipyard’s differentiated products varies over time. It also fails to account for variations in efficiency. Whereas Chinese workers may be relatively cheap, large South Korean or Japanese shipyards exploit economies of scale that smaller Chinese yards cannot. The balance of all these factors, in addition to subsidies, should influence a shipyard’s costs and prices.

Recognising this, a 2014 working paper by Myrto Kalouptsidi of Princeton University provides a new way to spot subsidies and measure their impact. Using detailed quarterly data on factors like a shipyard’s age, size, capacity and staffing levels Ms Kalouptsidi estimates cost functions—the relationship between a yard’s output and its cost of production—for 192 yards across China, Japan, South Korea and Europe. By analysing data between 2001 and 2012, she can isolate the impact of China’s 2006 policy.

The results are striking. A simple price-gap approach shows that Chinese ships cost 7.3% less than rivals’. Controlling for quality differences—Chinese ships are seen as lower quality and so should be around 3.5% cheaper, even in the absence of subsidies—gives a 4% gap, hardly justification for WTO rage. But Ms Kalouptsidi’s estimates show this is just part of the story. Government help artificially lowered Chinese firms’ costs by between 15-20%. The aid will have included explicit subsidies and hidden benefits, such as tolerating losses at state-owned yards. China’s market share jumped as the policy was introduced.

As in [Adam] Smith’s day, this has shifted resources. By comparing the costs and productivity of the shipyards in her sample, Ms Kalouptsidi forecasts how the market might have developed in the absence of China’s subsidies. Her analysis points to a big resource reallocation: absent the meddling, Japan’s market share would have been around 30 percentage points higher. Since many South Korean or Japanese yards are more efficient than China’s, it means that the true cost of ship production may well have risen. Bloated by subsidy, China’s yards have turned out a surfeit of vessels, often poorly matched to customers’ demands.
The important point here is that many of the distortions introduced by government meddling are hard to find but dangerous and expensive nonetheless.

Decorporatisation - The Dismal Science

Aug 13, 2014

or the knowledge economy, as some people may call it. At the Stumbling and Mumbling blog Chris Dillow invents a new world, decorporatisation. Chris writes,In the day job, I've coined a newish word - decorporatization.My chart shows what I mean. It show...

Does immigration hurt natives? - The Dismal Science

Aug 12, 2014

Immigration continues to be a hotly debated topic in many countries, including New Zealand. A number of New Zealand politicians express somewhat negative, shall we say, views on the matter, in much the same way as they do on foreign investment in this country. These politicians play on fears that immigration takes jobs away from natives and imposes significant costs on taxpayers. Such ideas continue to shape electoral campaigns and policy discourses in many countries.

Economists have not been able to steer this debate much. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. What happens if we introduce issues such as these into economic models of immigration? A new column at by Michele Battisti, Gabriel Felbermayr, Giovanni Peri and Panu Poutvaara considers How immigration benefits natives despite labour market imperfections and income redistribution. Just from the title you can guess that Winston Peters wouldn't be bring this piece up during the election campaign.

Battisti, Felbermayr, Peri and Poutvaara write,

In our recent working paper (Battisti et al. 2014), we have introduced wage bargaining, search frictions, and a redistributive welfare state into a framework that still includes skill complementarities between immigrants and natives in production. Hence the traditional, and important, channel of gains for natives (skill complementarity) is introduced in a much more realistic world of frictions and redistribution that can make immigrants costly for natives. We have then calibrated the model to match the average statistics that we observe for 20 OECD countries. We have also simulated two ‘counter-factual’ scenarios:

(i) How does native workers’ welfare compare between the status quo and a situation with no immigrants (closed borders), and
(ii) What has been the effect on native welfare of immigration during the last 10 years?
They then go on to discuss "The relative labour-market performance of immigrants".
Looking at the wages of natives and immigrants of similar skills across the 20 countries considered, some interesting regularities emerge. First, immigrants are usually paid less than natives with similar educational attainments. Second, unemployment rates are usually higher among immigrants.

Table 1. Migrants versus natives: Cross-country heterogeneity within the OECD

Rows 3 and 4 of Table 1 show that, within education groups, immigrants receive lower wages than natives, and the gap is particularly important in the low-skilled segment. Moreover, as shown on rows 5 and 6, high- and low-skilled immigrants alike are also more likely to be unemployed. These differences – even allowing for reasonable differences in productivity – suggest that:

(i) Migrants have worse outside options than natives, and so obtain lower wages through bargaining, and
(ii) They are more likely to be hit by job destruction shocks, and so are more often unemployed.
The next issue Battisti, Felbermayr, Peri and Poutvaara turn to is "How immigration can spur job creation".
The introduction of job creation by firms – an important feature of our framework – generates two important effects of immigration. In particular, if firms cannot discriminate between natives and immigrants in the search process, but can pay immigrants lower wages (as is the case in the data), then the presence of immigrants drives up the average return from job creation. This encourages firms to create more jobs, some of which will be filled by natives. However, if matches with immigrants are more likely to break (as implied by their larger unemployment rate), the expected return to job creation is lower and firms will create fewer jobs. Which channel dominates depends on the relative strength of each mechanism. This can be simulated by our model once we have carefully calibrated its parameters on the data.

Figure 1. Native welfare changes in two migration scenarios, %

We calibrate our model to match the empirical moments for the 20 OECD countries shown in Table 1. Besides the relative labour market performance of immigrants, we also match facts on public spending, letting the government finance public goods and unemployment benefits by proportional taxation. We also match GDP per capita and average job durations for both educational groups.

Figure 1 presents results from two main scenarios. In the first, we calculate the difference in welfare (which can be also thought of as the difference in real post-tax income) between the status quo observed in 2011 and a hypothetical situation with no immigrants (closed borders). We find that the native welfare gains from immigration are positive in 19 out of 20 countries. In all countries but Switzerland (where the effect is essentially zero) natives have, on average, gained from immigration, and sometimes the gain is rather large (up to 2% of after-tax income). In the second scenario, we compute the difference in welfare of natives between the status quo in 2011 and a hypothetical situation in which the immigrant share had been kept at the level of 2000. We find a positive gain from this recent immigration in 16 countries.

In 14 out of 20 cases, the existing stock of immigrants makes both skill-groups of natives (college and non-college educated) better off. In the canonical model without labour market imperfections, these Pareto gains would be impossible. Moreover, even incumbent immigrants are found to be better off with immigration. Again, in the canonical framework this is extremely unlikely, as new immigrants are more closely substitutable with incumbent immigrants than with natives. The reason for these somewhat surprising results is the job-creation effect described above. Namely, immigration can grease the wheels of the labour market by affecting job creation incentives.
So what, you may ask "What explains the cross-country heterogeneity in benefits?"
The comparative statics from our analysis reveal that the following country characteristics increase the native immigration gains from a one-percentage-point increase in the immigrant labour force share:

(i) Higher native–immigrant wage gaps, regardless of the skill group;
(ii) A lower native–immigrant unemployment gap for the low-skilled;
(iii) More generous unemployment insurance;
(iv) A higher share of tertiary-educated workers amongst immigrants;
(v) Lower government expenditures.

The intuition is as follows. Lower bargaining power for immigrants implies that they have lower wages, and this encourages firms to create more jobs. Also, lower job-destruction rates for immigrants make hiring an immigrant more valuable for firms and encourage firms to create more jobs. A more generous unemployment insurance system makes immigration more beneficial for natives because higher unemployment benefits reduce job creation, and immigration helps to alleviate this distortion. In other words, the greasing-the-wheels effect and its lowering of the unemployment rate are particularly valuable when distortions are large. A higher share of tertiary-educated immigrants and lower government expenditures increase the benefits because they lower the extent of redistribution from natives to migrants.
So what conclusions can we draw from this?
Our analysis shows that immigration into imperfectly competitive labour markets need not be worsening labour market outcomes for natives. Instead, it can improve the job creation incentives of firms. Thus, measures that aim at eliminating the immigrant–native wage gap may hurt natives. This positive effect is threatened if immigrants are too often unemployed or if too many of them are unskilled. Policies reducing the rate of job loss for immigrants would therefore help natives. Finally, in contrast to widespread belief, immigrants do not seem to hurt low-skilled natives, even in the more realistic framework developed here. This is because immigration is often balanced between more and less educated, because its job-creation effect can help, and because redistribution towards immigrants is not as large as often suggested in the debate.
So, in short, immigration can be good for you. It also suggests that some kinds of inequality (the immigrant–native wage gap in this case) can have positive effects and, perhaps most importantly, immigrants do not seem to hurt low-skilled natives. Just don't tell Winston.

  • Battisti, M, G Felbermayr, G Peri, and P Poutvaara (2014), “Immigration, Search, and Redistribution: A Quantitative Assessment of Native Welfare”, NBER Working Paper 20131.

The basic income and the welfare state - The Dismal Science

Aug 10, 2014

Cato Unbound is hosting a month-long debate on “The Basic Income and the Welfare State.” The lead essay, “The Pragmatic Libertarian Case for a Basic Income Guaranteei” by Matt Zwolinski, is up now. In it, Zwolinski argues that libertarians should regard a BIG as significantly better, on libertarian grounds, than the current welfare state. It is cheaper, less paternalistic, and less prone to rent seeking. And while it might not measure up to strict standards of libertarian purity, it has a much better chance of actually being adopted in a world where 99% of people reject that purist vision.

Responses from Mike Huemer, Jim Manzi, and Robert Frank will go up over the next week.

A related audio: Libertarians for a Guaranteed Minimum Income? featuring Matt Zwolinski. This is the Cato Daily Podcast for December 5, 2013.

Presidents and the U.S. economy - The Dismal Science

Aug 06, 2014

There is a new NBER working paper out on Presidents and the U.S. Economy: An Econometric Exploration by Alan S. Blinder and Mark W. Watson. The abstract reds:

The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.
So Democrats got lucky.

Incentives matter: drug mules file - The Dismal Science

Aug 05, 2014

This is the abstract of a new paper The market for mules: Risk and compensation of cross-border drug couriers by David Bjerk and Caleb Mason in the International Review of Law and Economics, Volume 39, August 2014, Pages 58–72.

This paper uses a unique dataset to examine the economics of cross-border drug smuggling. Our results reveal that loads are generally quite large (median 30 kg), but with substantial variance within and across drug types. Males and females, as well as U.S. citizens and non-U.S. citizens are all well represented among mules. We also find that mule compensation is substantial (median $1313), and varies with load characteristics. Specifically, for mules caught with cocaine and meth, pay appears to be strongly correlated to expected sentence if caught, while pay appears to be primarily correlated with load size for marijuana mules, who generally smuggle much larger loads than those smuggling cocaine and meth. We argue that our results suggest that this underground labor market generally acts like a competitive labor market, where a risk-sensitive, reasonably well-informed, and relatively elastic labor force is compensated for higher risk tasks.

Why capitalism is better than socialism - The Dismal Science

Aug 04, 2014

In this short (8 mins) video from ReasonTV philosopher Jason Brennan discusses his book "Why Not Capitalism?"."We're not the Borg from Star Trek. We want to engage in private projects we do by ourselves and not with others," says Jason Brennan, an asso...

Trade and the poor - The Dismal Science

Aug 04, 2014

A interesting new NBER working paper on Measuring the Unequal Gains from Trade by Pablo D. Fajgelbaum and Amit K. Khandelwal. The abstract reads:

Individuals that consume different baskets of goods are differentially affected by relative price changes caused by international trade. We develop a methodology to measure the unequal gains from trade across consumers within countries that is applicable across countries and time. The approach uses data on aggregate expenditures across goods with different income elasticities and parameters estimated from a non-homothetic gravity equation. We find considerable variation in the pro-poor bias of trade depending on the income elasticity of each country's exports and imports. Non-homotheticities across sectors imply that trade typically favors the poor, who concentrate spending in more traded sectors. (Emphasis added.)
So trade helps the poor given the fact that the poor concentrate their spending in the traded sectors of the economy. Fajgelbaum and Khandelwal writes,
We also find important effects from sectoral heterogeneity. As in the single-sector setting, the pro-poor bias increases with a country’s income elasticity of exports. But, in contrast with the single-sector estimation, the multi-sector model implies a strong pro-poor bias of trade in every country. On average over the countries in our sample, the real income loss from closing off trade are 57 percent for the 10th percentile of the income distribution and 25 percent for the 90th percentile.5 This bias in the gains from trade toward poor consumers hinges on the fact that these consumers spend relatively more on sectors that are more traded, while high-income individuals consume relatively more services, which are the least traded sector. Additionally, low-income consumers happen to concentrate spending on sectors with a lower elasticity of substitution across source countries. As a result, the multi-sector setting implies larger expenditures in more tradeable sectors and a lower rate of substitution between imports and domestic goods for poor consumers; these two features lead to larger gains from trade for the poor than the rich.

“Neo-liberals” and “progressives”: never the twain shall meet? - The Dismal Science

Jul 31, 2014

I was asked to give evidence on behalf of the Fabian Society to the Beveridge Committee on Broadcasting, and although I refused on the grounds that I was not a Socialist (this was countered by saying that there was not a specifically Socialist point of view on broadcasting), I did in fact prepare the first memorandum considered by the Fabian Society Committee on broadcasting and which was the basis from which their discussions proceeded.

Ronald Coase 1961
There is an interesting new working paper out on Ronald Coase and the Fabian Society: Competitive discussion in liberal ideology by David M. Levy and Sandra J. Peart. Levy and Peart open the paper by saying:

Ronald Coase wrote the 1949 memo that guided the discussion of the Fabian Research Group on broadcasting. In the evidence presented to the Beveridge Committee on broadcasting, the Fabians endorsed his recommendations by and large. These two facts have previously escaped notice and, as a result, our understanding of post-war economic thought has been misinformed. The stereotype of post-war economic thought divides the profession into two groups, “neo-liberals” and “progressives”. In this stereotyping “neo-liberals” are said to advance a policy agenda in which markets, rather than governments, provide services; “Progressives”, by contrast, are said to favor a greater role for governments in the provision of services. In this admittedly broad characterization, there is little room for “neo-liberals” to collaborate with “progressives”.

Coase is said to typify the “neo-liberal”, while the Fabians do the same for “progressives.” As such, we would expect that they would have nothing in common in the dimension of policy recommendations. The evidence presented below, however, demonstrates that Coase and the Fabians proposed a third alternative, one that avoided the government-market dichotomy that has been so important in stereotyping post-war thought. Instead of proposing a market or a government solution, Coase and the Fabians recommended that broadcasting in Britain be fragmented to break up the BBC monopoly whose origins Coase had so carefully studied (Coase 1950). When the Beveridge Committee recommended a continuation of the monopoly, Coase was, not surprisingly, distressed. Moreover, he was not pleased with the minority report that recommended commercializing television because Coase thought that policy would be outside the British consensus.

Coase’s willingness to allow public consensus to trump the theoretical rationale for market provision of broadcasting suggests a deep problem with the stereotype of post-war market liberalism. In both the memo for the Fabian Society and his book, Coase used a recently coined word—totalitarian—to describe the theoretical rationale for a broadcasting monopoly presented by the spokesperson of the BBC, Lord Reith. By the word “totalitarian” Coase meant something more general than the policies advocated by Hitler, Mussolini, or somewhat nearer at hand, Mosley, but rather the view that state policy can ignore the legitimate wishes of the citizens of the state. The idea that there are “democratic goals” that can be separated from “democratic means”—a view that Lord Reith articulated frequently as we document in note 8—is the heart of the danger which Coase always and everywhere opposed.
Interesting stuff. The idea that a socialist group like the Fabians were willing to go along with Coase on breaking up the BBC monopoly is not something we would expect to see given the standard division of post-war thought into two, non-intersecting, groups of socialists and (classical) liberals. Coase's opposition to totalitarian thought is somewhat less surprising.

Levy and Peart continue,
The first two paragraphs of the Coase memo reproduced in the documents section below (p. 20) speak to the heart of the issue. What is needed, Coase urged, is sufficient public information to allow an informed discussion to take place. In Coase’s view public discussion had been stymied. Perhaps for strategic reasons, those in authority have not revealed the requisite information about possible alternative arrangements. The issue Coase stresses is not the efficient satisfaction of wants by market processes but public knowledge with which people can work out what institutions seem best to them. In his 1950 British Broadcasting, Coase closes the chapter “Public Discussion of the Monopoly” with the consequences of systematic suppression of information:
Though the programme policy of the Corporation gave the lower social classes what they ought to have, it gave the educated classes what they wanted; or, at any rate, more of what they wanted than they thought they would obtain with what was believed to be the only alternative—commercial broadcasting (1950, p. 177)
The paternalism of the BBC is obvious in that the "lower social classes" got what the BBC considered they should have, rather than what they actually wanted and the "educated classes" got an amount of what they wanted decided by the BBC.

The first two paragraphs of Coase's memo referred to above read:
Memorandum by Mr. R. H. Coase

1. The task of the Beveridge Committee

What is wanted is an entirely new approach to the problems of broadcasting policy in Great Britain. The present attitude is one of uncritical acceptance of the existing organisation. This can largely be attributed to the way in which previous Committees worked. The Crawford Committee, which led to the establishment of the BBC, made (so far as I have been able to discover) no detailed examination of alternative schemes. And we know from Lord Elton that the Ullswater Committee (of which he was a member) came to their conclusions without questioning the basic assumptions on which the case for the existing organisation (and in particular the monopoly) rested.

The present Committee should take a different view of its responsibilities. Alternative arrangements should be examined. And most (if not all) of the evidence presented to the Committee should be published. The lack of information on what is possible has greatly handicapped public discussion. Publication of the evidence would permit an independent assessment of the conclusions reached by the Committee and would assist in the development of an informed public opinion on broadcasting policy.
Here we can see the typical Coaseian call for comparative institutional analysis. And a call to make sure that people have the information to basis such analysis on. We should always think about the role that alternative institutions play in ameliorating or exacerbating conflicts in a world of positive transaction costs - including broadcasting.