The Unassuming Economist

A new IMF paper by Djeneba Doumbia and Tidiane Kinda:

“Can a government reduce income inequality by changing the composition of public spending while keeping the total level of expenditure fixed? Using newly assembled data on spending composition for 83 countries across all income groups, this paper shows that reallocating spending toward social protection and infrastructure is associated with reduced income inequality, particularly when it is financed through cuts in defense spending. However, the political and security situation matters. The analysis does not find evidence that lowering defense spending to finance infrastructure and social outlays improves income distribution in countries with weak institutions and at higher risk of conflict. Reallocating social protection and infrastructure spending towards other types of spending tends to increase income inequality. Accounting for the long-term impact of health spending, and particularly education spending, helps to better capture the equalizing effects of these expenditures. The paper includes a discussion of the implications of the findings for Indonesia, a major emerging market where income inequality is at the center of policy issues”

From the IMF’s Finance & Development magazine:

“Markets and the state have long competed to control what Lenin called the commanding heights of the economy. After the Berlin Wall fell, markets seemed to reign supreme. Even many on the left, traditional supporters of a strong state, became champions of free markets. The brilliant economist Larry Summers professed “grudging admiration” for Milton Friedman and, while at the US Treasury in the 1990s, pushed for financial globalization, the free flow of capital across national borders.

Raghu Rajan never succumbed to the euphoria. While a firm believer in free markets and their benefits, he has been vocal about their costs. In Saving Capitalism from the Capitalists he wrote that the victims of competition should get help to ease their pain and secure their future: “Markets need a heart for their own good.” In 2005, in a now-famous speech, he warned that the excesses of financial globalization raised the odds of a “catastrophic meltdown,” earning a rebuke from Summers that Rajan was “slightly Luddite” and “largely misguided.”

The global financial crisis and recent discontent with globalization have proved Rajan prescient. His latest book attempts to go beyond warning of the dangers of unfettered capitalism to what can be done to fix it. Rajan suggests restoring the third pillar of society, the community, which he defines as a social group residing in a specific area that shares government and often a common heritage. Markets and the state remain indispensable, but “when the three pillars of society are appropriately balanced” … “society has the best chance for providing for its people,” particularly those who lose out from the effects of trade and technology.

Rajan points up the damage from international trade. US job loss from increased foreign competition, for instance, has contributed to lowering the life expectancy of middle-aged non-Hispanic white males. “It is as if ten Vietnam wars were simultaneously taking place, not in some faraway land, but in homes in small-town and rural America,” Rajan writes. Yet these communities’ fate was largely neglected by the mainstream establishment parties, who Rajan laments “do not even admit to the need for change” and tend to castigate losers from the effects of trade and technology as belonging to a basket of deplorables.

Rajan of course knows that communities too can pose dangers. The book contains a fascinating account of how markets and the state overcame the shortcomings of feudal communities, which provided stability but did little to spare most from abject poverty. Modern communities also erect walls, and overemphasis on tradition and fear of strangers and new ideas can leave people “trapped by the past.”

Still, Rajan argues, markets and the state have usurped communities’ power, and the balance needs to be reset. Power must devolve from global and national levels to the community. Rajan notes that as machines and robots begin to produce more of our goods and services, human work “will center once again around inter-personal relationships.” Communities could well be the workplace of tomorrow.”

From VOX post by Eduardo Levy Yeyati, Martín Montané, and Luca Sartorio:

“Governments around the world spend a large portion of their budgets on active labour market policies aimed at improving access to new jobs and higher wages. This column presents the first systematic review of 102 experimental interventions comprising a total of 652 estimated impacts. It finds that programmes are more likely to yield positive results when GDP growth is higher and unemployment lower, and that programmes aimed at building human capital show significant positive impact.”

Continue reading here.

From an IMF working paper by Signe Krogstrup and William Oman:

“Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition. The literature provides a menu of policy tools for mitigation. A key conclusion is that fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments. Some tools and policies raise unanswered questions about policy tool assignment and mandates, which we describe. The literature is scarce, however, on the most effective policy mix and the role of mitigation tools and goals in the overall policy framework.”

From the Economist Intelligence Unit:

“The EIU’s Global Liveability Index 2019 has crowned Vienna as the world’s most liveable city. Vienna has retained pole position this year, overcoming stiff competition from Melbourne, Sydney, and Osaka.

Canadian cities have fared better than their US counterparts, with three in the top 10 and a fourth, Montreal (20th), ranked above any city south of the border. Meanwhile, the Venezuelan capital, Caracas, ranks in the bottom 10 as the government’s fight for legitimacy has impeded its ability to provide basic services for its citizens.”