The Unassuming Economist

From Dani Rodrik’s preface to Santiago Levy’s Book:

“A few years ago as I was finishing up my book Economics Rules: The Rights and Wrongs of the Dismal Science (Norton 2015), I realized that the manuscript contained a serious omission. I had written at length about how and why economists misuse the powerful tools of their discipline, but had said little about the successes. So I decided I would open the book with three vignettes of economics at its best. Each vignette would have its hero: an economist who combined economic models with real-world judgement to make life better for lots of people.

Santiago Levy was one of the three heroes I chose. (The names of the other two heroes will let the reader gauge how demanding was the standard I applied: John Maynard Keynes and William Vickrey.) Santiago was the principal force behind the anti-poverty program Progresa in Mexico that quickly became a model for many other countries. This was an innovative, incentive-based program that was novel at the time, in 1997. It replaced inefficient price subsidies with direct cash grants to poor families as long as their children were kept in school and received periodic health checks. So successful was the program that subsequent Mexican political administrations would seek credit for it by renaming it; hence Progresa would turn into Oportunidades, which eventually became Prospera.”

Continue reading here.

From a new IMF policy paper:

“This paper reviews the experience with the fiscal space assessment framework that was piloted during 2017–18. In 2016, staff proposed an operational definition of fiscal space and a new four-stage framework for its assessment. These were discussed informally by the Board in June, and a Board paper “Assessing Fiscal Space: An Initial Consistent Set of Considerations”incorporating Directors’ views was published in December. Fiscal space was narrowly defined as the room for undertaking discretionary fiscal policy relative to existing plans without endangering market access and debt sustainability. The framework was developed in response to the need to provide a more systematic approach to assessing fiscal space in the Fund’s surveillance. It was designed as a tool to inform the availability of fiscal space over a 3 to 4 year horizon for discretionary action, as opposed to the optimality of its use. Indeed, it was stressed that the availability of space does not necessarily mean that it should be used or should not be further expanded. The framework was piloted in the Article IV consultations of 34 advanced economies and emerging markets, comprising almost 80 percent of global GDP in PPP terms.”

A new IMF working paper finds “striking differences in the evolution of labor force participation across countries, and even more across groups of workers. While the heterogeneous timing and pace of the demographic transition can explain part of the divergent trends, other factors, including policies and differential exposure to the global forces of technological progress, are also at play.”

“The findings of this paper suggest that many countries so far successfully counteracted the negative forces of aging on aggregate labor force participation by strengthening the attachment of specific groups of workers to the labor force. Changes in labor market policies and institutions, together with structural changes and gains in educational attainment, account for the bulk of the increase in the labor force attachment of prime-age women and older workers in the past three decades. Conversely, technological advances, namely automation, while beneficial for the economy as a whole, weighed on labor supply of most groups of workers, and can partially explain declining prime-age male participation. Individual-level evidence confirm the significant impact of vulnerability to routinization, and that detachment from the labor force is significantly more likely among individuals whose current or past occupations are more vulnerable to automation. But encouragingly, higher spending on education and active labor market programs, and access to more diverse labor markets, tend to attenuate this negative effect, at least for prime-age workers.”

From a new IMF working paper:

“In this paper, we quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries through VAT, PIT, and CIT. We find that VAT has the least efficiency costs but is highly regressive, while PIT and CIT lead to higher output and consumption drop, but have better distributional implications. Further, we find that cash transfers targeting rural households are able to mitigate the negative distributional impacts of VAT, while public investment shows almost no distributional impacts.”

“Our results suggest that low-income countries indeed face very different equity-efficiency tradeoffs comparing to advanced economies due to their unique economic structure. It therefore is important to investigate quantitatively the impacts of other tax instruments that have been extensively studied under the environment of advanced economies. For instance, we believe that the optimal progressivity of income tax is also a critically important feature in low-income countries. It is also interesting to study whether and how will classical optimal taxation results under complete markets change when migrated to an economy resembling low-income countries. Another limitation of our study is the omission of transitional dynamics in our model, which is important to the evaluation of short-run welfare effects. We leave these extensions to future work.”

From a new VOX post:

“Monetary policy shocks can affect different types of agents differently. These distributional effects can have important consequences for policy effectiveness. Using US data, this column explores how shocks differentially affect the prices faced by households with different incomes. The results suggest that middle-income households’ consumption baskets have more volatile prices than those of high-income households, and they are therefore more exposed to monetary policy shocks.”

“[…] Figure 3 plots the impulse responses for selected income percentile-specific CPIs. The monetary policy shock is a 25 basis-point increase in the Federal Funds rate on impact, thus a contraction. The consumption price indices of the high-income households react substantially less to monetary policy shocks than those for the middle of the income distribution. The difference is economically meaningful. After 12 months, the top 1% households’ CPI responds by 34% less, and the 96-99th percentile households by 22% less, than the CPI of the households in the middle of the income distribution (40th-60th percentiles). After 24 months, the differences are still 12% and 6%, respectively.”