The Unassuming Economist

From a paper by Paolo Di Lorenzo and Eric Anthony Lacey“

“This paper provides an overview of issues related to fiscal consolidation drawing on the
literature; it distills some lessons from fiscal consolidation episodes using a new database covering
196 countries from 2000 to 2023. The paper discusses the motives, timing, design, and political
economy of fiscal consolidation, as well as its macroeconomic and social impacts. We find that
fiscal consolidation is often necessary and successful in restoring fiscal sustainability by stopping
debt accumulation, but less successful in lowering debt levels; moreover, it can also entail
significant costs and trade-offs in terms of growth, poverty, and inequality. Composition also
matters, as expenditure-based consolidations tend to be more successful than revenue-based
consolidations and less likely to cause a deterioration in poverty rates or inequality. However,
revenue gains usually play an important role starting in the second year of consolidation. Overall,
the paper suggests that successful fiscal consolidation requires careful consideration of the
economic context, the composition of adjustment, complementary economic policies, and
communication and credibility of the strategy. The best way to implement fiscal adjustment is to
establish a consolidation strategy in normal/non-crisis times} to ensure that governments do not
have to rely on abrupt, pro-cyclical adjustments that may exhaust all buffers in the aftermath of a
shock.

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From a paper by Azzeddine Cheddad and Mohammed Mekidiche:

“This article analyzes the feasibility of inflation targeting (IT) in Algeria using data from Q1 2000 to Q4 2021. IT is widely used, although its efficacy in emerging areas, notably MENA, is disputed. Algerian monetary policy dynamics and the central bank’s response to inflation and production changes are examined using Taylor Rule and GMM. The Bank of Algeria appears to value interest rate smoothing above short-term economic instability. The central bank’s aggressive response to inflation goal deviations supports its price stability promise in an IT environment. The research shows a lower focus on production stability, possibly due to the oil-dependent economy and labor market rigidities. The study finds that Algeria’s monetary policy has IT aspects, but its efficacy depends on its economic setting and institutional architecture. To further comprehend Algeria’s macroeconomic stabilization efforts, future study should examine global economic circumstances, commodity price volatility, and monetary and fiscal policy. This study adds to the discussion on IT’s usefulness in emerging economies by highlighting the necessity to address economic conditions and institutional frameworks. IT may help stabilize prices in Algeria, but executing this monetary policy framework in a unique economic setting is difficult.”

From a paper by Peter Lihn, Jørgensen, and Kevin J. Lansing:

“We show that the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, provides a simple measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Higher values of the anchoring measure imply less sensitivity of rational inflation forecasts to movements in actual inflation. The approximate value of the model’s anchoring measure can be inferred from observable data generated by the model itself, as given by 1 minus the autocorrelation statistic for quarterly inflation. We show that a shift in the collective indexing behavior of firms allows the model to account for numerous features of evolving U.S. inflation behavior since 1960.”

Matthew A. Killingsworth, Daniel Kahneman, and Barbara Mellers explore the relationship between income and emotional well-being.

“Using dichotomous questions about the preceding day, [Kahneman and Deaton, Proc. Natl. Acad. Sci. U.S.A. 107, 16489–16493 (2010)] reported a flattening pattern: happiness increased steadily with log(income) up to a threshold and then plateaued. Using experience sampling with a continuous scale, [Killingsworth, Proc. Natl. Acad. Sci. U.S.A. 118, e2016976118 (2021)] reported a linear-log pattern in which average happiness rose consistently with log(income).”

Read more here.

From Noah Smith:

“With the return of the border crisis and Biden’s plans for a big new immigration reform, it looks like the immigration issue is heating up again. In the coming year we’re probably going to hear lots of very heated arguments from a lot of different angles, and I’m inevitably going to be blogging about some of these. But one aspect of the immigration debate that I feel like I’ve already dealt with pretty well is the question of wages.

A lot of people think immigration lowers wages for native-born Americans. This is true of both immigration opponents, but also of some supporters, who think an influx of workers will help restrain inflation. This is a natural thing to think, since everyone knows that immigration increases labor supply. But what fewer people realize is that immigration also raises labor demand, which tends to cancel out the downward pressure on wages. In late 2020 I wrote a post called “Why immigration doesn’t reduce wages”, in which I explained how this works and listed a bunch of the relevant evidence. I wanted it to be a useful and comprehensive guide that people could come back to again and again.

In this post, I’m going to explain why immigration doesn’t lower wages for native-born people (except possibly a little bit, in a few special circumstances). But before I do that, there’s one thing you really have to understand: No one is going to be persuaded by this post. There are two reasons for this.

First, people don’t really believe social science evidence. It took years and years of empirical research — solid results, almost all pointing in the same direction — just to shift academic economists’ opinions on the effects of minimum wage. The average person, not being an academic economist, has even less of an idea of how reliable social science research is.

Second, in my experience, anti-immigration people are completely set in their belief that immigration should be restricted. It’s their fixed north star. The justifications change — Lower wages! Environmental destruction! Brain drain! Rule of law! Cultural change! — but the policy conclusion never wavers. They know what they want to do.

So this post isn’t going to persuade anti-immigration people to change their stance, and it’s probably not going to persuade many normies to be up in arms about the need to let in more immigrants, either. But it’s still important to write, and not just because I’m a stubborn S.O.B. who will die face-down in the muck fighting for The Empirical Evidence. It’s because in another 20 years or so, when America’s current freakout over identity and nationhood has passed, we’re hopefully going to be ready to let in a bunch of immigrants again. And when that time finally comes, these arguments will matter.”

Continue reading here.