The Unassuming Economist

A new post by Peter Dizikes summarizing David Donaldson’s new paper on how railroads helped India trade and grow: “railroads fostered commerce that raised real agricultural income by 16 percent.”

“Donaldson’s paper on the subject, “Railroads of the Raj: Estimating the Impact of Transportation Infrastructure,” just published in the American Economic Review, may also speak to the importance of infrastructure more broadly. After all, as he notes in the paper, about 20 percent of World Bank lending in the developing world goes to infrastructure projects. And in the United States, debate rolls on about the value of building and refurbishing America’s roads, bridges, railroads, ports, and airports.”

“And while every country is different, and circumstances change over time, Donaldson’s research suggests that the growth India experienced as its railroads grew was specifically the result of increased trade, a general finding that could be applied to other countries and other eras.”

From a new post by Mohamed A. El-Erian:

“[…] the reputation of mainstream economists has taken a beating in the last 10 years. The bulk of them failed to predict the 2008 crisis that almost tipped the global economy into a multiyear depression. They also didn’t foresee the aftermath.

Most made the mistake of treating the crisis as a cyclical shock and forecast a V-type growth snapback. They were prisoners of an excessive mean-reversion mindset: They acknowledged that growth was taking a huge hit due to severe financial dislocations, but they forecast that economic activity would bounce back strongly and inclusively.

Instead, the experience of advanced economies more closely resembled an “L,” in which they got stuck in a “new normal” characterized by a prolonged period of low and insufficiently inclusive growth.

The damage goes well beyond lost output, diminished consumer welfare, widespread economic insecurity and a worsening of the inequality of income, wealth and opportunity. The shortfalls fueled the politics of anger, along with a heightened mistrust of the establishment, institutions and expert opinion.

This, in turn, has diminished the credibility of economics. Meanwhile, many students have complained to me that the mainstream economics they are taught is divorced from real-world relevance. It is only a matter of time before the funding for economic research risks becoming a casualty.

Yet this huge failure has not been the result of ignorance about the limitations of the discipline, nor is it the consequence of a lack of new, disruptive ideas.

Here are some reasons for the erosion of the insights and predictive powers of mainstream economics:

• The proliferation of oversimplifying assumptions, including those that sideline many elements of real-world behaviors and interactions, in an effort to make models seem more “scientific.” This leads to overreliance on excessively abstract estimation techniques and approaches.
• Insufficient consideration of financial linkages and little allowance, if any, for the possibility that financial dislocations can disrupt the economy.
• Poor and grudging adoption of important insights from behavioral science, along with excessive hesitation to develop multidisciplinary approaches.
• An oversimplification of uncertainty and the ways it influences economic interactions.
• Overemphasis of equilibrium conditions and mean reversion, a trend that reduces the understanding of transitions, structural changes and tipping points.”

“Two decades ago, the economics profession concluded that trade with developing countries was not seriously hurting unskilled workers in developed countries.” A new post by Adrian Wood argues that “the debate from which that consensus emerged came to an end prematurely. Even now, the evidence does not permit any firm conclusion about the contribution of globalisation to the economic misfortunes of less-educated people in developed countries. Had there been less consensus among economists, more might have been done, sooner, to mitigate the social costs of globalisation.”

From a new post by Timothy Taylor:

“How much would you be willing to pay, in actual money, for an additional 30 years of life expectancy?”

“Fuchs and Eggleston are especially focused on the inequality of life expectancy. So they look at where the age of death falls for the 20th and the 80 percentile of this distribution. Then they calculate how the age of death at these percentiles has evolved over time. It’s a little tricky to eyeball this result from the graph (and the authors provide more specific statistical meaures), but the inequality from 80th to 20th percentile diminished somewhat between about 1950 and 2000, but since then the degree of inequality hasn’t changed much.”

A new IMF country report says that “Poverty and income inequality are high in Israel compared with peers, being exacerbated by the lower labor participation and productivity of some population groups, such as the Israeli-Arab and Haredi populations and non-Haredi Jewish women. Israel’s low redistribution of income through the budget limits its impact on reducing poverty and inequality. Given the projected rise in the share of the Haredi, and, to a lesser extent Arab, populations in coming decades, addressing the structural issues behind their low participation and productivity is an urgent matter.”