The Unassuming Economist

From VoxEU:

“There has been considerable criticism of the general reliance on GDP as an indicator of growth and development. One strand of criticism focuses on the inability of GDP to capture the subjective well-being or happiness of a populace. This column examines new growth models, paying particular attention to Bhutan, which has pursued gross national happiness, rather than GDP, since the 1970s. It finds evidence of the Easterlin paradox in Bhutan, and draws out lessons for macroeconomic growth models. 

New Zealand’s Prime Minister, Jacinda Arden, recently proposed the idea of a ‘wellness budget’ for the country, and suggested that wellbeing should be incorporated into their growth agenda (Arden 2019). In a similar vein, William Nordhaus incorporated climate change into traditional growth models, efforts for which he was awarded the Nobel Memorial Prize in Economics (Gillingham 2018). In a famous article, Easterlin (1974, revised 1995) asked whether “raising the incomes of all will raise the happiness of all?”. This question was raised following the observation that reported happiness levels remained flat over the long-run in countries which had experienced high rates of real income growth. This anomaly was subsequently dubbed the Easterlin Paradox. How relevant is this in today’s times? The following table provides some interesting clues.

 

Table 1 World Happiness Rankings

Source: Helliwell et al. (2018)

 

In Table 1, the World Happiness Rankings for different years are compared with their respective real GDP per capita outcomes. According to the Easterlin Paradox (ceteris paribus), the change in World Happiness Scores should not be proportional to the change in real GDP per capita (year-on-year difference) in any given year. If this is the case, then the country with the highest per capita income will not necessarily be that with the highest levels of happiness.

As can be noted in the table, countries such as Iceland, Switzerland, and Australia seem to be in line with the Easterlin Paradox. Bhutan seems to follow a similar trend. Interestingly, the US seems to be following the Easterlin Paradox. This has been largely attributed to the reduction in America’s social capital and the fact that “…certain non-income determinants of US happiness are worsening alongside the rise in US per capita income, thereby offsetting the gains in subjective well-being that would normally arise with economic growth” (Helliwell 2018). As such, it is quite apparent that there is a discrepancy at some level between the perceived positive proportional relationship between the notion of incomes (input) and happiness (outcome). Not only does this introduce the need to look beyond income levels, it also reasserts the need to look at other well-being measurements, such as happiness, as key measures of growth outcomes.

How can this discrepancy be bridged? More importantly, how can these elements be incorporated in a systematic manner into the policymaking ecosystem, rather than merely being proclamations from higher moral ground?”

Continue reading here.

From a new VOX post on the role of immigrants:

“The response of labour supply to negative shocks is different across regions due to varying levels of labour mobility. This column shows that the elasticity of labour supply in response to economic shocks is lower in the euro area than in the US, suggesting that a lack of labour mobility may be an obstacle to labour market adjustments in the euro area. Policies aimed at reducing the complexities of migrating for jobs could help ease this mobility gap.”

“The higher mobility of migrants implies that they can act as a buffer and reduce the fluctuations of the employment rate in response to regional shocks to employment. A simple counterfactual exercise can help appreciate the magnitude of such contribution. We first simulate the impact of a 1.9% decrease in the level of employment on the employment rate in each euro area country using the elasticities estimated for natives and foreign-born (the value is equal to one standard deviation of the series of overall employment variations). In this status quo scenario, the employment rate falls in all countries by 13% on average (the green dots in Figure 2). We then focus on two alternative scenarios, and simulate the same impact assuming that all individuals had the natives’ (low) elasticity or the foreigners’ (high) elasticity.

Comparing the first (lower bound) scenario to the status quo informs us on the current contribution of mobile foreign-born individuals in absorbing the shock – our estimates suggest that they help reduce its impact on employment rates at the country level by around 7% (to 1.4% on average, see the blue dots). And if all individuals had the same propensity to move as foreigners (as in the second, upper bound scenario), the impact of the negative employment shock would be halved (orange dots). These patterns are common to all euro area countries.”

From a new VOX post:

“Growth in life expectancy during the last two centuries has been attributed to environmental change, productivity growth, improved nutrition, and better hygiene, rather than to advances in medical care. This column traces the development of medical care and the extension of longevity in the US from 1800 forward to provide a long-term look at health and health care in the US. It demonstrates that the contribution of medical care to life-expectancy gains changed over time.”

“Researchers agree that there is a recent slowdown in national health expenditures across all age groups (Figure 4), but there is little agreement on exactly why and when it started. Cutler and Sahni (2013) considered the role of the recession and estimated that it accounted for 37% of the slowdown between 2007 and 2012. They noted that a decline in private insurance coverage and cuts to some Medicare payment rates accounted for another 8% of the slowdown, leaving 55% of the spending slowdown unexplained. Researchers who asked whether the Affordable Care Act could explain part of the slowdown reached mixed conclusions about the importance of its contribution (McWilliams et al. 2013, Song et al. 2012, Colla et al. 2012).

Whatever the case may be, the slowdown began in the early 2000s, prior to the implementation of the Affordable Care Act. Chandra et al. (2013) argued that the three main causes for the slowdown were the rise in high-deductible insurance plans, state-level efforts to control Medicaid costs, and a general slowdown in the diffusion of new technology, particularly for use by the Medicare population.

The diffusion of technologies previously used among the elderly to the non-elderly population (e.g. elective hip or knee replacement for people with severe arthritis) might explain some of the relative change but is not the full story. The recent reduction in the relative growth of medical spending on people over 65 and the slowdown in the real growth rate of spending for all citizens remain to be fully understood. ”

From a new VOX post:

“The sudden rise in trade between China and the US – known as the ‘China shock’ – has been the subject of numerous studies, but the even more dramatic increase in trade between China and developing countries in Asia has been somewhat overlooked. This column studies the impact of the China shock on income inequality in Vietnam. It suggests that increased trade with China reduced income inequality. It resulted in income growth for the lowest income quantiles while higher income groups saw their income decline.”

From Dani Rodrik’s weblog:

“We launched today a new initiative for academic economists that we hope will make the discipline of Economics more relevant to today’s pressing policy problems. The initiative consists of a network called Economics for Inclusive Prosperity (EfIP) with an initial set of 10 policy briefs. The briefs open with an introductory statement of our philosophy and go on to specific policy recommendations for finance, trade, labor markets, social policy, technology policy, and political institutions. The network is co-directed by Suresh Naidu, Gabriel Zucman, and me, and has 11 additional founding members. We hope to expand the group and we will add more policy briefs in the months ahead.

As we state in our introduction, we believe

mainstream economics – the kind of economics that is practiced in the leading academic centers of the country – is indispensable for generating useful policy ideas. Much of this work is already being done. In our daily grind as professional economists, we see a lot of policy ideas being discussed in seminar rooms, policy forums, and social media. There is considerable ferment in economics that is often not visible to outsiders. At the same time, the sociology of the profession – career incentives, norms, socialization patterns – often mitigates against adequate engagement with the world of policy, especially on the part of younger academic economists.

The problem is compounded by the lousy reputation Economics has acquired among proponents of an inclusive economy. Too often the discipline is viewed as the source of the policies that have produced the excesses and fragilities of our time. Mainstream economics and neoliberalism are viewed as one and the same.

We beg to differ:

Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism – or market fundamentalism, market fetishism, etc. — is a perversion of mainstream economics, rather than an application thereof. And contemporary economics research is rife with new ideas for creating a more inclusive society. But it is up to us economists to convince their audience about the merits of these claims.”