The Unassuming Economist

From a new VoxChina post:

“Many developing countries adopt industrial policies favoring upstream sectors. Liu (2018) shows these policies might enhance aggregate production efficiency. When sectors form a production network, market imperfections generate distortions that compound through input demand linkages, accumulating into upstream sectors and creating an incentive for well-meaning governments to subsidize these sectors. The study proposes the measure “distortion centrality,” which is a sufficient statistic that can guide policy interventions in arbitrary networks. Distortion centrality predicts sectors that were promoted in South Korea in the 1970s and modern-day China, suggesting that these policies might have generated positive aggregate effects.”

“I find that the heavy and chemical sectors promoted by South Korea in the 1970s were upstream (as visibly evident from Figure 2E) and had significantly higher distortion centrality than non-targeted sectors, suggesting that government interventions contributed positively to aggregate economic performance.

In modern-day China, non-state-owned firms in sectors with higher distortion centrality have significantly better access to loans, receive more favourable interest rates, and pay lower taxes. These sectors also tend to have more state-owned enterprises, to which the government directly extends credit and policy subsidies.

My quantitative analysis reveals that in China, differential sectoral interest rates, tax incentives, and funds given to state-owned enterprises all generate positive aggregate effects and, taken together, improve aggregate efficiency by 4.8%. Moreover, distortion centrality correlates negatively with sectoral size, suggesting that promoting large sectors would lead to aggregate losses.”

From a new VOX post:

“There is mounting evidence that income inequality and disparities in wealth have been rising in advanced economies in the recent decades. Using data on advanced and emerging economies, this column investigates the link between an economy’s financial structure – that is, the mix of bank-provided versus market-provided funds – and income inequality. Results show that the relationship is not monotonic. More finance reduces income inequality up to a point, but beyond that point inequality rises, especially if finance is expanded via market-based financing.”

[…]

“Making causal inference is a challenge here. The link between finance and income inequality can go either way. More finance can lead to more income inequality, but more inequality may also foster the development of banks and specialised financial services. A common identification strategy employs instruments that are correlated with the financial structure but not correlated with income inequality. Following the literature, in a recent paper (Brei et al. 2018) we instrument the development of banks and financial markets by their initial values, legal origin, societal fractionalisation, and the location of countries (relative to the Equator). Furthermore, we control for other determinants of income inequality, including the degree of education, industrial specialisation, and inflation.

The main results of our regression analysis are represented in Figure 3. Both higher bank activity and higher market activity translate initially into lower income inequality. However, this pattern reverses beyond a certain threshold. The trajectories of income inequality, once the threshold is reached, differ for bank-based versus market-based financial development. Specifically, the subsequent rise in income inequality is much steeper in market-based financial systems. This suggests that the development of financial markets over the last decades could have produced an increase in income inequality. ”

Chris Wellisz profiles Branko Milanovic, a leading scholar of inequality for the March 2019 issue of Finance & Development:

“As a child growing up in Communist Yugoslavia, Branko Milanovic witnessed the protests of 1968, when students occupied the campus of the University of Belgrade and hoisted banners reading “Down with the Red bourgeoisie!”

Milanovic, who now teaches economics at the City University of New York, recalls wondering whether his own family belonged to that maligned group. His father was a government official, and unlike many Yugoslav kids at the time, Milanovic had his very own bedroom—a sign of privilege in a nominally classless society. Mostly he remembers a sense of excitement as he and his friends loitered around the edge of the campus that summer, watching the students sporting red Karl Marx badges.

“I think that the social and political aspects of the protests became clearer to me later,” Milanovic says in an interview. Even so, “1968 was, in many ways, a watershed year” in an intellectual journey that has seen him emerge as a leading scholar of inequality. Decades before it became a fashion in economics, inequality would be the subject of his doctoral dissertation at the University of Belgrade.

Today, Milanovic is best known for a breakthrough study of global income inequality from 1988 to 2008, roughly spanning the period from the fall of the Berlin Wall—which spelled the beginning of the end of Communism in Europe—to the global financial crisis.

The 2013 article, cowritten with Christoph Lakner, delineated what became known as the “elephant curve” because of its shape (see chart). It shows that over the 20 years that Milanovic calls the period of “high globalization,” huge increases in wealth were unevenly distributed across the world. The middle classes in developing economies—mainly in Asia—enjoyed a dramatic increase in incomes. So did the top 1 percent of earners worldwide, or the “global plutocrats.” Meanwhile, the lower middle classes in advanced economies saw their earnings stagnate.

The elephant curve’s power lies in its simplicity. It elegantly summarizes the source of so much middle class discontent in advanced economies, discontent that has turbocharged the careers of populists from both extremes of the political spectrum and spurred calls for trade barriers and limits on immigration.”

Continue reading here.

A new IMF working paper revisits ” the issue of classification errors in the U.S. Current Population Survey. While the results still support the previous literature’s conclusion that the job finding probability plays a more important role in explaining unemployment fluctuations (“outs of unemployment”) than the job separation probability does (“ins to unemployment”), they moderate the conclusion that “Out Wins”. Moreover, once the proposed adjustment is applied, the importance of the participation margin in explaining unemployment fluctuations becomes smaller than previously argued—around 10 percent in this paper vs previous estimates of 20 to 30 percent (Elsby, Hobijn and Sahin, 2015). Therefore, the misclassification correction procedures in the labor force survey continue to be an important issue in understanding labor market dynamics. The results of this paper suggest that policymakers should pay closer attention to the job separation margin than previously thought and less on the participation margin.”