The Unassuming Economist

From a new working paper by Susan N. Houseman:

“Two stylized facts underlie the prevailing view that automation largely caused the relative decline and, in the 2000s, the large absolute decline in U.S. manufacturing employment: first, manufacturing real output growth has largely kept pace with that of the aggregate economy for decades, and second, manufacturing labor productivity growth has been considerably higher. These statistics appear to provide a compelling case that domestic manufacturing is strong, and that, as in agriculture, productivity growth, assumed to reflect automation, is largely responsible for the relative and absolute decline in manufacturing employment. Although the size and scope of the decline in employment manufacturing industries in the 2000s was unprecedented, many
see it as part of a long-term trend and deem the role of trade small.”

“That view, I have argued, reflects a misinterpretation of the numbers. First, aggregate manufacturing output and productivity statistics are dominated by the computer industry and mask considerable weakness in most manufacturing industries, where real output growth has been much slower than average private sector growth since the 1980s and has been anemic or declining since 2000. Second, labor productivity growth is not synonymous with, and is often a poor indicator of, automation. Measures of labor productivity growth may capture many forces besides automation—including improvements in product quality, outsourcing and offshoring, and a changing industry composition owing to international competition. Indeed, the rapid productivity growth in the computer and electronics products industry, and by extension in the manufacturing sector, largely reflects improvements in product quality, not automation. In short, the stylized facts, when properly interpreted, do not provide prima facie evidence that automation drove the relative and absolute decline in manufacturing employment.”

“It is difficult to parse out the effects of various factors on manufacturing employment, and research does not provide simple decompositions of the total contribution that trade and the broader forces of globalization make to manufacturing’s recent employment decline. Nevertheless, the research evidence points to trade and globalization as the major factor behind the large and swift decline of manufacturing employment in the 2000s. Although manufacturing processes continue to be automated, there is no evidence that the pace of automation in the sector accelerated in the 2000s; if anything, research comes to the opposite conclusion.”

“Manufacturing still matters, and its decline has serious economic consequences. Reflecting the sector’s deep supply chains, manufacturing’s plight contributed to the weak employment growth and poor labor market outcomes prevailing during much of the 2000s. Research shows that such large-scale shocks have persistent adverse effects on affected communities and their residents, though these costs rarely are fully considered in policy making (Klein, Schuh, and Triest 2003). In addition, because manufacturing accounts for a disproportionate share of R&D, the health of manufacturing industries has important implications for innovation in the economy. The widespread denial of domestic manufacturing’s weakness and globalization’s role in its employment collapse has inhibited much-needed, informed debate over trade policies.”

From a new IMF working paper:

“Corruption is macro-relevant for many countries, but is often hidden, making measurement of it—and its effects—inherently difficult. Existing indicators suffer from several weaknesses, including a lack of time variation due to the sticky nature of perception-based measures, reliance on a limited pool of experts, and an inability to distinguish between corruption and institutional capacity gaps. This paper attempts to address these limitations by leveraging news media coverage of corruption. We contribute to the literature by constructing the first big data, cross-country news flow indices of corruption (NIC) and anti-corruption (anti-NIC) by running country-specific search algorithms over more than 665 million international news articles. These indices correlate well with existing measures of corruption but offer additional richness in their time-series variation. Drawing on theory from the corporate finance and behavioral economics literature, we also test to what extent news about corruption and anti-corruption efforts affects economic agents’ assessments of corruption and, in turn, economic outcomes. We find that NIC shocks appear to negatively impact both financial (e.g., stock market returns and yield spreads) and real variables (e.g., growth), albeit with some country heterogeneity. On average, NIC shocks lower real per capita GDP growth by 3 percentage points over a two-year period, illustrating persistence in the effect of such shocks. Conversely, there is suggestive evidence that anti-NIC efforts appear to have a sustained positive macro impact only when paired with meaningful institutional strengthening, proxied by capacity development efforts.”

From a new working paper by Priya Ranjan and Giray Gozgor:

“We construct a theoretical model to capture the compensation and efficiency effects of globalization in a set up where the redistributive tax rate is chosen by the median voter. The model predicts that the two alternative modes of globalization- trade liberalization and financial openness- could potentially have different effects on taxation. We then provide some empirical evidence on the relationship between taxation and the alternative modes of globalization using a large cross-country panel dataset. We make a distinction between de jure and de facto measures of globalization and find a robust negative relationship between de jure measures financial openness and tax rates. There is no robust relationship between de facto measures of finanical openness and taxation. As well, the relationship between trade liberalization (both de jure and de facto measures) and tax rates is not robust and depends on the measures of taxation as well as the time period of analysis.”

A new IMF working paper by Ezequiel Cabezon and Christian Henn says:

“Based on a permanent income analysis, Gagnon (2018) has prominently suggested that Norway has saved too much, thereby free-riding on the rest of the world for demand. Our public sector balance sheet analysis comes to the opposite conclusion, chiefly because it also accounts for future aging costs. Unsurprisingly, we find that Norway’s current assets exceed its liabilities by some 340 percent of mainland GDP. But its nonoil fiscal deficits have grown very large (to almost 8 percent of mainland GDP) and aging pressures are only commencing. Therefore, Norway’s intertemporal financial net worth (IFNW) is negative, at about -240 percent of mainland GDP. As IFNW represents an intertemporal budget constraint, this implies that Norway’s savings are likely insufficient to address aging costs without additional fiscal action.”

 

A new IMF country report says that “Saudi Arabia’s labor market is characterized by a persistently high unemployment rate, low private employment ratio, and a low labor participation rate for nationals. The authorities are undertaking a wide range of labor market interventions to address these issues. The analysis in this paper shows that these interventions are helping to reduce distortions in the labor market, including by boosting female labor force participation and reducing the wage gap between expatriates and nationals in the private sector, but the impact on the rest of the economy is not always positive as firms adjust to the higher cost of labor. Reforms should therefore be gradual to minimize their impact on growth. A comprehensive set of policies is also needed to foster job creation for nationals. Measures should include policies toward levelling the playing field between national and expatriate workers so that employers have less of a preference for employing expatriates, setting clear expectations about the limited prospects for public sector employment, boosting female labor force participation, and strengthening education and training to support increased productivity of nationals.”