The Unassuming Economist

From a new IMF working paper:

“Populists claim to be the only legitimate representative of the people. Does it mean that there is no space for civil society? The issue is important because since Tocqueville (1835), associations and civil society have been recognized as a key factor in a healthy liberal democracy. We ask two questions: 1) do individuals who are members of civil associations vote less for populist parties? 2) does membership in associations decrease when populist parties are in power? We answer these questions looking at the experiences of Europe, which has a rich civil society tradition, as well as of Latin America, which already has a long history of populists in power. The main findings are that individuals belonging to associations are less likely by 2.4 to 4.2 percent to vote for populist parties, which is large considering that the average vote share for populist parties is from 10 to 15 percent. The effect is strong particularly after the global financial crisis, with the important caveat that membership in trade unions has unclear effects.”

From a new FRB Richmond Working Paper:

“Following two centuries of general economic prosperity, Petersburg has experienced a prolonged period of decline. A fixed-boundary city combined with a shrinking population may have left the city vulnerable to negative economic shocks as city officials faced “fixed” municipal costs in a context of declining tax revenues. When large layoffs occurred beginning in the 1980s, the city appears to have lost residents, especially higher-skilled residents, to the Richmond suburbs north of the city. Additionally, a new regional shopping center in neighboring Colonial Heights drained the city of retail tax revenues. These development led to a prolonged period of decline in the city.

But other Virginia cities also experienced substantial layoffs around the same time as Petersburg, yet they did not decline to the same degree. The question is why? We model two scenarios. The first incorporates two cities, one relatively economically vibrant and the other less so. We show that a negative productivity shock to the less vibrant city will lead to an outflow of high-skill workers to the more vibrant neighboring city along with higher-value homes. As tax revenues fall, the city experiences fiscal decline, which amplifies and reinforces its decline.

We also model an isolated city in which a negative shock does not result in as large of an outflow of high-skilled workers. In this setting, the city experiences a loss in aggregate utility for residents but is in a better position to weather the shock and eventually return to a path of economic growth.

Evidence from several Virginia cities is consistent with the implications of the models. In Petersburg, the period after the shocks saw high-income residents and higher home price areas decrease in the city and increase in areas closer to Richmond. As higher-skilled workers left, the population of Petersburg got older and less well-educated. In contrast, isolated cities that experienced somewhat similar shocks showed less pronounced effects. We conclude that Petersburg was a victim of being “too close” to Richmond, and as residents and the tax base left the city, an inability to scale down city municipal costs led to the severe fiscal difficulties seen today.”

From a new CEP Discussion Paper:

“The US suffers from large regional disparities in employment-population ratios (from here on, “employment rates”) which have persisted for many decades (Kline and Moretti, 2013; Amior and Manning, 2018). Concern has grown about these inequities in light of the Great Recession and a secular decline in manufacturing employment (Kroft and Pope, 2014; Acemoglu et al., 2016), whose impact has been heavily concentrated geographically (Moretti, 2012; Autor, Dorn and Hanson, 2013). In principle, these disparities should be eliminated by regional mobility, but this has itself been in secular decline in recent decades (Molloy, Smith and Wozniak, 2011; Dao, Furceri and Loungani, 2017; Kaplan and Schulhofer-Wohl, 2017).

In the face of these challenges, it has famously been argued that foreign migration offers a remedy. Borjas (2001) claims that new immigrants “grease the wheels” of the labor market: given they have already incurred the fixed cost of moving, they are very responsive to regional differences in economic opportunity – and therefore accelerate local population adjustment.1 And in groundbreaking work on the Great Recession period, Cadena and Kovak (2016) argue further that foreign-born workers (or at least low skilled Mexicans) continue to “grease the wheels” even some years after arrival. In terms of policy, if migrants are indeed regionally flexible, forcibly dispersing them within receiving countries may actually hurt natives as well as the migrants themselves. Basso, Peri and Rahman (2017) have extended the hypothesis beyond geography: they find that immigration attenuates the impact of technical change on local skill differentials.

I revisit the original question of geographical adjustment using decadal US data spanning 722 commuting zones (CZs) and 50 years – and using an empirical model which explicitly accounts for dynamic adjustment. Remarkably, I find that foreign migrants (and specifically new arrivals) account for around half of the average population response to local demand shocks. But in areas better supplied by new migrants, population growth is not significantly larger nor more responsive to these shocks. I claim that foreign migration crowds out the contribution from internal mobility that would have materialized in the counterfactual. This is not to say that natives gain little from the contribution of foreign migration. As I argue below, undercoverage of unauthorized migrants in the census may overstate the crowding out effect – and understate the foreign contribution to adjustment. And in any case, conditional on the overall level of immigration, a regionally flexible migrant workforce may save natives from incurring potentially steep moving costs themselves. As Molloy, Smith and Wozniak (2017) suggest, this may in principle shed a more positive light on the decline in regional mobility since the 1980s.”

From a new ECB Research Bulletin:

“How beneficial is labour market flexibility – for instance, the ability to hire and fire workers – for firm growth? And how does such flexibility interact with a firm’s ability to obtain bank credit? This article provides evidence that less rigid employment protection benefits firms during times of scarce credit. We study the performance of credit constrained Spanish firms during the financial crisis of 2008-09, exploiting a firm-size-specific labour regulation that imposes more stringent employment protection on firms with more than 50 employees. We find that Spanish firms with fewer than 50 employees operating in sectors in which labour and capital are close substitutes grew faster during the financial crisis when exposed to a negative credit shock than similarly credit constrained but larger firms. This effect is more pronounced for firms that were more productive before the crisis, suggesting that flexible employment protection laws benefit otherwise healthy firms that are credit constrained, by enabling them to substitute labour for capital and continue growing.”

A new working paper introduces “an original panel dataset based on the text of country reports by the International Monetary Fund. It consists of a total of 2594 Article IV consultation and program review documents. The reports were published between 2004 and 2017 and cover 189 countries. The text of these reports provides a unique in-depth window into the IMF ‘s assessment of the most important macroeconomic issues. They provide indications of the perceived policy weaknesses, economic risks, ongoing reforms and implemented or neglected policy advice. Thus the content of IMF reports are widely used for qualitative and quantitative analysis in the economics, political science and IR literature.”

The paper also presents “three examples in applying text analytic techniques on the dataset to demonstrate and validate its application for research. First, [it] compares conventional measures of resource dependence with a metric based on term frequency in reports. ”

“Second, [it] analyzes mentions preceding reform events as a way to study reform intent.”

“Finally, [it] shows how mentions of keywords describing opposite fiscal policy stances mimic changes in IMF policy advice during the global financial crisis.”