Lit in Review: 3 for Intermediate Macro

The July 2015 American Economic Journal: Macroeconomics had several papers that have something to say to my intermediate macroeconomics students.

How good is the Cobb-Douglas production function at describing the real world?
Berthold Herrendorf, Christopher Herrington, and Akos Valentinyi, "Sectoral Technology and Structural Transformation" (working paper)
They use three different functions, one each for ag, manufacturing, and services and they add imported intermediate inputs to the model we use. If they allow each one to have different technology growth, they can "capture the main technological forces behind the postwar US structural transformation" from ag/manufacturing to a services-oriented economy. They tested letting each sector have a different alpha, but it turns out that doesn't make much of a difference.

Permanent and transitory income shocks
Christian Bayer and Falko Juessen, "Happiness and the Persistence of Income Shocks" (2013 draft)
Persistent income changes "have a significant impact on happiness while transitory shocks do not."

The Trilemma
Michael Klein and Jay Shambaugh, "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy" ungated
My time in Nigeria gave me some interesting insights on some of our macro models. While I can easily wave my hands a bit and put the US, Germany/Greece/any EU country, and China on the three edges of the impossible trilemma, Nigeria tried to have it all. They don't have free capital mobility, and their controls have been getting tighter over the last ten years; they try to have a fixed exchange rate, but they are classified as free because sometimes they have to let it fluctuate wildly before reeling it back in; and they want a central bank that can still impact the economy, but it's pretty weak.

This paper asks if Nigeria's strategy could be effective: "whether partial capital controls and limited exchange rate flexibility allow for full monetary policy autonomy. We find partial capital controls do not generally allow for greater monetary control than with open capital accounts, unless they are quite extensive, but a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies."

Lit in Review: Social insurance programs

From the AER meeting in 2015:
"Despite the consensus that higher unemployment benefits lead to longer durations of unemployment, the precise magnitude of the effect is uncertain."

Card et al. "The effect of unemployment benefits on the duration of unemployment insurance receipt: new evidence from a regression kink design in Missouri, 2003-2013"
They find an elasticity of 0.35 pre-recession and between 0.65-0.9 during and after. [Translation: increase unemployment benefits by 1% and people stay unemployment 0.35% longer before the recession.] Why the difference? Could be jobs are harder to come by, so you're less likely to turn one down if your benefits aren't that generous. Could be that unemployment benefits lasted so much longer during the recession.

Coile, Duggan, and Guo. "Veterans' Labor Force Participation: What role does the VA's disability compensation program play?"
They find that increases over time in the generosity of disability compensation closely coincides with the decrease in veterans' labor force participation and that veterans have become increasingly sensitive to economic shocks. Back of the envelope calculations suggest no more than 55% of DC recipients who would not have been eligible before it became easier to get disability would be working without it.

Nekoei and Weber. "Recall expectations and Duration Dependence" in Austria
They survey a bunch of unemployed people and break them into two groups: those who expect to be hired back to their old job (temporary unemployment) and those who don't (permanent). Interestingly, 42% of separations are planned to be temporary, but only 58% of temporary layoffs actually are, while 19% of permanent layoffs are recalled. "On average, jobs ending in temporary layoffs lasted a shorter period but paid higher wages." They find that temporarily laid-off workers are less likely to look for a job (51% don't even try) and, even if they do, don't look as hard for one (use fewer search methods).

Inequality and income support

Villarreal, Francisco (2014). "Monetary Policy and Inequality in Mexico," MPRA Paper 57074.

What happens to household income inequality when there is an unexpected increase in interest rates? "Monetary policy shocks are identified using a structural model, and inequality is measured from household survey data. Then the effect of shocks on inequality is evaluated using a time–series model." Earlier work on the US finds that an unexpected increase in interest rates increases inequality. In Mexico he finds that inequality decreases because median hourly wages drop and workers don't increase labor enough to make up for it, but this effect only lasts for about two years.

Sumner argues in a lot of places that we should focus much more on consumption inequality than on income or wealth inequality; even though the three should be correlated, it's actual standards of living we should be worried about. Oddly enough, then

The correct response to economic inequality (from utilitarian perspective) is to abolish all taxes on capital income, and institute a progressive consumption tax.

Unfortunately, most of the Piketty supporters seem to think it's better to have lower tax rates on a wealthy person who devotes his wealth to riotous living, as compared to a wealthy person who is thrifty, putting the money into capital formation, charity, and/or his children's welfare. I have yet to see a persuasive justification for this bizarre policy preference.

If what we're really concerned about, then, is increasing incomes for the bottom, how do you do it? Economists are best at telling us how not to do it. One example I am likely to mention in my intro macro class next semester from Carden tries to remind people of what is not seen when we choose to pay more to buy American. The broken window fallacy as seen in socks. Meanwhile, here are some comments on a universal basic income, none of which are very satisfying to me but at least it's being discussed.

Lit in Review: Money in India, Africa, and helicopters

Gupta, Abhijit and Rajeswari Sengupta. 2014. "Is India Ready for Flexible Inflation Targeting?" , Indira Gandhi Institute of Development Research Working Paper, June 2014.

The standard intermediate macro take has been to encourage some form of flexible inflation targeting or Taylor rule approach. In developing countries, however, financial systems are less well-developed which makes the lags between data, policy, and outcomes more troubling and, because food prices form a much larger portion of the price basket, if most central banks had responded to the recent food price spikes by sharply tightening the money supply the results would have been dire. India has followed a "multiple indicator approach" since 1998 that focuses more on stable interest rates and exchange rates, but also uses money, credit, output, trade, capital flows, government debt, and the inflation rate. The lack of a single policy rate reduced the clarity of signals sent to the market and introduced (predictable) variance in other variables, however, so in 2011 the RBI officially focused on the weighted average overnight call money rate.

Gupta and Sengupta estimate a Taylor rule for India using 90-98, 98-04, and 04-13 data. Inflation matters less and less for policy making, particularly in the last period that includes the food price spike - albeit the Wholesale price index (WPI) matters more than the CPI. They also estimate exchange rate stability, monetary independence, and capital account openness over time (the impossible trinity) and show that exchange rate stability has much less weight today than it did even as recently as 2000 when it was the primary goal. The increased monetary independence this bought indicates it would be more possible than in the past for India to follow some kind of Taylor rule.

Buiter, Willem. 2014. "The Simple Analytics of Helicopter Money: Why it Works - Always" Economics, Discussion Paper 2014-24.

Milton Friedman called a permanent increase in the money supply a "helicopter drop." It turns out that Quantitative Easing (QE) fits that description so long as people believe the Fed is not likely to sell off its assets. Buiter cites other research that says helicopter drops might successfully increase aggregate demand, but they also might fail. He then demonstrates that there are three conditions for this to always boost aggregate demand: 1) people want cash for reasons other than earning more money (ie - people value cash even when there is modest inflation because we use it as a medium of exchange); 2) the price of money is positive; 3) cash is irredemable (ie - it's not a liability for the government and not backed by gold). He claims it was failure to consider this last condition that led to the erroneous idea that helicopter drops would not increase AD. (PS - that picture is really not fair to our former Chairman, but it's entertaining.)

Asongu, Simplice. 2013. ''A note on the long-run neutrality of monetary policy: new empirics", MPRA Paper 56796 and AGDI Working Paper WP/13/032, posted 23 June 2014.

Money is neutral in the long-run in Africa too.

As it should be.

Lit in Review: Child Undernutrition and Labor

Harttgen, Klasen, and Vollmer, "Economic Growth and Child Undernutrition in Africa," GlobalFood Discussion Paper.

They add to the short but slowly growing literature on the impact of economic growth on child undernutrition that I based my dissertation work on. They add Klasen (08), Friedman and Schady (09), and Subramanyam et al (11) to the ones I knew about.

They identify a micro-macro paradox: increasing household income reduces undernutrition significantly but increasing average incomes doesn't make nearly the same difference. It is rather disturbing to me to see for how many SSA countries there has been significant improvement in GDP/capita, but a worsening of child hunger. Among the things they find that matter more than GDP/capita, household asset rank matters, suggesting that inequality may be an important part of the story.

Bhagowalia, Menon, Quisumbing, and Soundararajan, "What Dimensions of Women's Empowerment  Matter Most for Child Nutrition?' IFPRI Discussion Paper 01192

Women's empowerment can be a fairly vague (their preferred word: complex) term, so it is nice to see the authors breaking various dimensions of it down to see which are correlated with better outcomes. From the abstract: "Results from logit models indicate that both a greater degree of women’s empowerment and greater maternal endowments [read: height and education] are associated with better long-term nutritional status of children [in Bangladesh]. Attitudes toward domestic violence have an effect on child stunting and mobility; participation in decisionmaking is an important influence on dietary diversity. Consistent with previous studies, maternal height and maternal schooling decrease the probability of stunting, and maternal schooling is positively associated with dietary diversity. While these are not immediate measures of empowerment, they are positively associated with child nutritional outcomes and reflect prior investments in women and girls." However, they have almost no control variables in the regressions, so it is uncertain how much is due to these factors directly, and how much is the fact they signal correlation with socio-economic status or other factors.

De Paoli and Mendola, "Does International Migration Increase Child Labor?" Centro Studi Luca d'Agliano Development Studies Working Paper 339.

An interesting data combination allows them to look out how out-migration of workers from different skills impact local labor markets, and how those impacts affect some 200,000 children studied in 38 different countries. They find that allowing low-skilled workers to emigrate increases local wages for the parents, reducing child labor. It might have also been the case that it raised the wage for child labor, which would increase child labor, but this does not seem to be a significant factor. They also see that female emigration reduces child labor by more than male emigration. "According to our estimates, a 10% increase in the migration rate decreases the probability of child labor by 1.2 percentage points (p.p.) and the total time of weekly work by 7.3 hours." I count 209 reported regressions and, at first glance at least, the vast majority tell the same overall story.

Lit in Review: Poverty and Livestock in Eastern Africa

Tsehay and Bauer, "Poverty Dynamics and Vulnerability: Empirical Evidence from Smallholders in Northern Highlands of Ethiopia," presented at the IAAE August 2012.

They study Yetmen and Shumsheha in rural Ethiopia. Between 1994 and 2010, the percent of households owning oxen increased from 5% to 75% and 46% and livestock assets more than tripled in value. Literacy has gone down, but school enrollments are up significantly.

The poverty dynamics are quite interesting. Half of the households are worse off, moving down from subjacent or medial poor to ultra poor (<$0.50/day) and 1/4 moved up - not out-of-poverty up, but up to slightly-less-poor. The worsening happened between 2004 and 2010, while 1994-2004 had seen significant improvement.

Table 5 shows the number of times out of 4 rounds that a household was poor:

          Yetmen             Shumsheha
0          9.8                   6.93
1         27.45                31.68
2         35.29                30.69
3         19.61                24.75
4          7.84                 5.94

Wainaina, Okello, and Nzuma, "Impact of Contract Farming on Smallholder Poultry Farmers' Income in Kenya," presented at the IAAE August 2012.

Their study of 180 smallholder farmers in Nakuru county finds that farmers contracting with Kims Poultry Care Center received roughly 27 percent more revenue per bird than independent farmers. They used matching propensities.

I'm uncertain whether they mean that "KPCC is the only large poultry farm that works with smallholder farmers in Kenya..." or the only one that works with smallholders in a contract that also provides inputs and interlinked credit. Markets for inputs and outputs tend to be quite thin, so partnering with KPCC improves market access significantly. So these results may not be typical of contract farming overall. Oddly enough, independent farmers have statistically larger birds than contract farmers, so the revenue per kg difference is slightly larger. Extension agents and higher education make farmers less likely to sign a contract, so they aren't explaining the difference.

Smallscale farmers have 100-500 birds, medium scale is 500-1000. The county has 40-45% poverty. It sells processed chicken and eggs to local tourist hotels and throughout East Africa.

They regularly reference Nyaga, 2007; poultry sector country review, FAO

Gelan, Engida, Caria, and Karugia, "The Role of Livestock in the Ethiopian Economy: Policy Analysis using a computable general equilibrium model for Ethiopia," also IAAE August 2012.

From the abstract: "We extend an existing dynamic recursive general equilibrium model for the
Ethiopian economy which better models the livestock sector. A separate herd dynamics
module enables us to specify stock-flow relationship, distinguishing between the capital role
of livestock and the flow of livestock products. We also improve the underlying system of
economic accounts, to better capture draft power and breeding stocks." What they look at is growth in total factor productivity (TFP) - how efficient or productive the sector is - comparing a positive shock to TFP growth in livestock, cereals, or cash crops. So imagine you wanted to invest in agricultural productivity in Ethiopia and ask which of those three you should invest in.

They find that an increase in livestock TFP growth from 0.5% to 3.1% would do as much to increase total agricultural GDP as an increase in cereal TFP growth from 2.2% to 4.3%. Livestock TFP growth would also improve export value more than cereal or cash crop TFP growth. Even though domestic prices for livestock decrease, labor income goes up fastest with livestock TFP growth, so the poor benefit the most from livestock TFP growth. Cereal TFP growth improves their caloric consumption by the most.

Lit in Review: Ghanaian Agriculture

Egyir, Adu-Nyako, and Okafor examine how the "Made in USA" poultry label affects consumer choice in Ghana. Among the statistics they offer, domestic production accounts for 10% of the poultry market. In 2010, the local price was just under $4/lb while imports cost under $1.10/lb Costs could be brought down with better management and vaccine delivery. Two decades ago, fish provided 60% of the animal protein they consumed, but poultry has been growing in importance. Most of the chickens (60%) are bought directly from the farm, with supermarkets only serving the high income group. The poultry packing industry is in its extreme infancy.

500 consumers were surveyed about their attitudes on how likely they were to purchase domestic chicken, versus Tyson (US), Brazilian, European, or Asian chicken. 56% were likely to buy Made in the USA, and 72% to buy Ghanaian. Asian chicken did not score very highly. More than 80% recognized COOL chicken. (That's Country of Origin Labeling, not the fellow on the right.)

Here is Kris Klokkenga's description of the differences between trying to farm in Illinois and in Ghana:

Best of 2011

Time for some intense naval-gazing. I wasn't going to do one of these, but then I enjoyed others' so much for the posts I missed that it seemed much more interesting.

Top Ten Posts of 2011
1. Google's statement on AUN's amazing internet usage, got a lot of doubting comments and a few  defending and very plausible explanations.
2. Nutrition Labeling, describing the new requirement that meat include information on calories from fat.
3. Unemployment: Leads and Lags - Breaking unemployment into separate decisions to hire or fire will give us a better indicator of where the economy is going (has been) than total unemployment.
4. AEA session on agricultural export bans during the 07/08 food price crisis.
5. Microinsurance in Kenya via cellphone
6. My first visit to AUN. Classes will resume Thursday the 24th
7. Low saturated fat diet vs. low simple carbohydrate diet
8. QE2 and food prices - debunking the idea that the Fed is causing global food price inflation
9. Food safety, food movements, and paternalism
10. Lit in Review: Food Demand -- Ethiopia and Speculators
Honorable Mention (because I thought it was fun): The socially acceptable price of fried chicken, also known as the political economy of fast food markets in South Korea.

Top Ten Posts of 2010 (in 2011)

1. My pictures of the Thorvaldsen's Christus and apostles statues, mentioned in a Church lesson this year.
2. Lit in Review: Grossman and Helpman, there has been steady interest in summaries and other papers that make use of the "Pay to Play" model of lobbyists.
3. Food in Africa: Too much and too little discussing the problem of getting food from food-surplus states to food-deficit states. There was never a large spike, but a steady stream of interest throughout the year.
4. High Hopes for Rwandan Agricultural Development
5. Food Security in Nepal which has been of increasing interest lately
6. Cutting Costs Through ... Fonts?? Some fonts go easier on the printer's ink
7. Population Health vs. Individual Health - commentary on macro vs. micro in economics and health
8. Ethiopian Monetary Policy - combines monetary policy, food prices, Ethiopia's development goals (food self-sufficiency), and growth prospects
8. Five from vacation: education, hyperinflation, and Chinese food safety.
10. Fed governor: if we could guarantee 5% NGDP growth, it would be great - I'm glad this made the list because I think it was my most significant post, interviewing Governor Dudley about what they are targeting and Sumner's policy.

Where did my visitors come from in 2011?

Random Links: food governance, being LDS, behavioral economics

C. Juma on how to improve Africa's research infrastructure - basically, make research institutions more like teaching institutions and teaching institutions more research oriented.

A fascinating Kenyan website called I paid a bribe. The tagline is: uncover the market price of corruption.

The price of orange juice at a 34-year high.

Price transmission in NYC from subway to pizza.

Why are Americans eating less meat? Partly higher relative prices, partly recession, party "Flexitarianism."

WalMart pays Nicaraguan farmers less than other retail outlets, but offers much less price variance in compensation. Since food price variance has increased, this might be a better deal than it used to be.

"What is essential to being a good Mormon? According to the [Pew] survey [of pretty active American members of the Church of Jesus Christ of Latter-day Saints], 80 percent said "believing Joseph Smith saw God the Father and Jesus Christ" is essential to being a good Mormon, 73 percent said "working to help the poor,"" Other interesting sound bites:

• The Latter-day Saints surveyed had a more favorable opinion of Pres. Obama than LDS Senate Majority Leader Reid (25 to 22)
• 97% of us identify as being Christians, believe in Jesus' resurrection, and use the word "Christian" as the single word that best describes us, while 49% of non-Mormons do not think we're Christian
• Most of us rank being a good parent as more important than career or religious activities
• 60% of converts cited church beliefs as why they joined. 60% of converts joined between 18 and 35 years old.
• 82% say they have a food storage, and almost half have 3 months stored up. When Pres. Ensign came to check on us and assess our needs, we were happy to report that we had 1-2 weeks of food stored up and enough cash to satisfy our needs. Water was another story, but we could boil the tap water to make more as needed and had already refilled a 5 gallon (20 liter) drum with boiled water.
• Even though most identified as conservative, we are much more positive about immigrants and immigration than the average conservative.

Asking people to give a lot of examples actually convinces them that something is less likely than asking them only a few examples. It is the ease of coming up with the marginal example that matters rather than the total number.

Bellemare on how to do well in an economics class.

How to prolong lithium battery life.

Lit in Review: Case Studies about LDS in Africa

Martinich, author of the LDS Church Growth blog, has published a series of case studies on the growth of the Church of Jesus Christ of Latter-day Saints globally, including on opening new cities for missionary work in general and two case studies in Ghana and Ethiopia showing how that was done specifically. Of interest to me, he recommends leaders use cost-benefit analysis in determining where new cities should be opened as part of the "homework" required for the revelatory process.

In Sunyani, Ghana, there were previously no members of the church in late 2010 when 6 young missionaries and one senior couple were sent in to form three "groups" (very small congregations ... yes, very small) in a city of less than 100,000. In the course of one year they had not only turned two of them into "branches" (small, but self-sustaining congregations, in this case around 50 people attending each week) but a fourth congregation had also been formed. The branches are being led by local leadership instead of missionaries.

In Awasa, Ethiopia, one family had been meeting since 2003 but did not become a branch until 2008 (average attendance about 20). When full-time missionaries were assigned in mid-2010, attendance rocketed from 20 to 70 by the end of the year. There are now four congregations there, though attendance has been highly variable and most of the members appear to be under the age of 21. Some local religious leaders also joined the Church during this time period. The groups are still heavily dependent on the missionaries for leadership and training.

In other posts, Martinich reports on recent Church growth in Sierra Leone and the temporary removal of senior missionary couples from the Democratic Republic of Congo following the election violence last month.

Big Bag of Africa: Agriculture and Millennium Villages

A new paper is out that finds almost zero impact from the Millennium Villages Project. Wanjala and Muradian surveyed Kenyan MVP recipients and their non-recipient neighbors in the district and found that while "the project caused a 70% increase in agricultural productivity among the treated households, tending to increase household income, it also caused less diversification of household economic activity into profitable non-farm employment, tending to decrease household income." To say Clemens cheers would not do his sentiments justice, but Blattman certainly has a more skeptical take on the paper. He shows that there may be a problem with their evaluation strategy, effectively matching away the most important gains. If so, then "MVs actually raise incomes by 10% and assets by a third." The cordial debate between Clemens and Blattman on the latter's blog is impressive and worth reading. (HT: The .Plan that got it from MR, who got it from CGD, which is where I ought to have read it in the first place.)

Record heat in Zimbabwe killed several hundred livestock recently due to lack of water and good grazing land. Climate change is of course suspected to have contributed. The difficulty is in identifying how many cattle would have died had temperatures been just 1 degree Celsius less, or how much more likely this event was as a result of climate change.

In Nigeria, there are increasing tensions between cattle-herders and farmers in Abia as cattle are reported to have destroyed crops worth millions of Naira (tens of thousands of US dollars). Note, the article has a heavy pro-farmer bias.

Closer to my home, a new national government program in Adamawa State hopes to increase farmer yields by 300% with improved varieties of sorghum. The project is led by Prof. Babtunde Obilana, who plans that the government will buy more of the sorghum to use for its school feeding program.

Meanwhile, the LDS Church has a third stake in Port Harcourt. A stake is a group of congregations, and this means that church membership in and around Port Harcourt has grown by around 50% since 2002 when the last stake was created. It is very likely that new stakes will also be formed in Benin City, where the three current stakes have grown to some of the largest in the Church worldwide and could easily be split into 5-6 stakes.

Mozambique's national statistics arm has a new report showing that 99.9% of their agriculture is for subsistence only.

Botswana's government tries to make sure that government subsidies don't go to farms that are not being actively used, a process called black listing. This article discusses blacklisting figures for the last few years and the costs involved.

Lit in Review: SSA Development

Wantchekon, Leonard, "Deliberative Electoral Campaigns and Transition from Clientelism: Evidence from a Field Experiment in Benin." Wantchekon got permission from the major presidential political candidates in Benin to run an experiment on their campaigns. The randomly selected treatment villages had two town hall-style discussions about important political topics while control villages had the standard rallies. Among the interesting conclusions from his research, rallies cost $15/person to hold but town hall meetings only $2/person; turnout is 5% higher after town halls; and average spending (cash and gifts) to voters was not statistically different between treatment and control groups so that's not what's driving it. It seems that town hall meetings may be the more efficient way to go in national elections.

Aye and Gupta, "The Effects of Monetary Policy on Real Farm Prices in South Africa." They find using a VAR model that both anticipated and unanticipated monetary policy impacts farm prices in the way we would expect (more money supply --> higher prices, big surprise; but lower money supply does not lower prices) but while statistically significant they don't explain much of the variation in what is happening from 1970 to 2010. I wonder if they would have gotten much different results if they looked at  1975-2005 instead and took out the two major episodes of international food price volatility. How much are they driving the small impacts? They also do not attempt to explain how anticipated monetary shocks could have a significant impact or why negative money shocks don't have price impacts. I would hypothesize at least for the latter that it is because of an inflationary shock to supply that the monetary authority chose lower money supply growth, so we wouldn't see a change that direction because of endogeneity problems.

Clemens and Demombynes' latest salvo in the Millennium Villages conflict: the MVP released a paper for the first time comparing progress in the villages to progress in the rest of SSA. Unfortunately, they still do this improperly. What would they have found doing it more properly?

In rural areas of the Ashanti region where the MVP site is located, stunting has been falling just as much as at the project site. The Millennium Village contains less than 1% of Ashanti Region’s population, so even allowing for a generous “spillover” effect of MVP programs to neighboring areas, it is implausible that the village is driving the trend across Ashanti. Comparing the project site to the national trend is likely to overstate the impact of the project.

Blattman reports on the results of an experiment in Kenya by Friedman, KIremer, Miguel, and Thornton, giving education grants to girls in secondary school. In addition to improved test scores and later marriage years, they find improved knowledge of politics and therefore ... more legitimacy for political violence as a way of solving political problems. Ooh. Blattman notes that his own work is starting to find a similar trend in Ugandan women.

Nicita, Olarreaga, and Porto examine "Pro-poor trade policy in Sub-Saharan Africa." They find that the average (of 6) country's trade policies are biased in favor of poorer households, but that developed countries' barriers are biased in favor of richer African households. This suggests, potentially, that reducing average trade barriers in Africa may harm the poor

Big Bag of Development: Signalling commitment and WWGD

How do you signal your commitment? This is one of the big questions in my own research, and there are two interesting recent answers:

1. Pakistan has begun to normalize trade relations with India. India had granted most favored nation (MFN) status to Pakistan in the mid-90s. In addition to the real effects from open trade, this is a costly signal of, I hope, better things in the future.

2. The Center for Global Development has an index measuring developed countries' commitment to development. I had heard of the index before, but it is now apparently more interactive, allowing you to see at a glance why countries scored what they did, comparing where each is strong and weak. Factors that go into it include amount and quality of foreign assistance (aid), trade, allowing in migrants, not selling weapons to unstable states, and others. Also handily, you can break the index down not only by component, but by region: how committed is this country or that to development in Africa vs. in Southeast Asia?  Barder and Roodman discuss.

A glorious World Bank paper that is almost certain to make its way into my intermediate microeconomics final this year (if you're a student reading this, you're welcome and thanks for reading) uses the language of income and substitution effects to demonstrate the different impacts that conditional cash transfers have vs. if they were only unconditional cash transfers. That is, how much more do we get for our conditions? By their argument, the cash transfer is an income effect and the conditionality is a substitution effect. Part one of a two part series by the authors of the paper.

Barder also shares some thoughts on an interesting development question: What Would Google Do? Specifically, how would Google run aid coordination/collaboration/correlation efforts? The answer is remarkably obvious when framed that way: set up one repository like a Google document or map to which every aid agency contributes. Instead of trying to hound down every possible aid agency that might or might not be working in your area before you deploy, you go to the one website and see if your planned measles vaccination project has already been done or is being planned by another group. More resources go where they are more needed and there is greater accountability.

Best Answer to a Midterm Question

We will be spending a good deal of time in the next part of my micro principles class talking explicitly about incentives. As a warm up to it and a check of the intuition we'd already covered, I asked them to consider a recent economics research paper. It looked at Italian banks and noted that some 1900 politicians served on banks' boards of directors. I asked how having a politician on the board would affect the bank's incentives.

About one fourth of the students came up with some version of the paper's results: those banks with a politician in an executive capacity gave out loans to political friends who were not necessarily good credit risks, so their balance sheets were in more trouble on average than banks that were not similarly blessed. The paper (here) however showed with more nuance that merely being on the board did not have a significant impact.

One person took it a step further: Politicians usually steal, this student wrote, and so a bank with a politician at its head would have no money to lend out.

I smell a candidate for some Libertarian literature.

Condie - Risk and Uncertainty

tBelow the fold is an interview with Dr. Scott Condie, who traveled with me through BYU and then Cornell's economics programs. He discusses his behavioral models of financial risk and uncertainty. The question is what people do when their information is highly ambiguous: we know there's more than a 25% chance of a strange coin toss coming up heads, but it might be 33% or it might be 50% or it might be 60%, and we just don't know. And if some investors are more than risk averse, but loss averse or maximin-ers or something else, that adds more complications. In that world then, how do markets respond, how informative are prices, and what opportunities are there for people with inside information to rig the system?

Lit in Review: Nigerian Agriculture 1

This has been an impressive time for papers coming out about Nigerian agriculture. Eight were uploaded to my reader just last night.

Segun-Olasanmi and Bamire look at maize-cowpea intercropping in Oyo (far west). They find that while men (72%) and women (28%) farmers earn statistically different revenues from intercropping (N76,500 vs. N42,400 - about $500 vs $300) per hectare, and have statistically different costs, men don't have statistically higher profits (N31,000 vs N20,000 - about $200 vs $140). This is in large part explained because men use three times as much inorganic fertilizer and more than twice as much in labor costs. About half also work at other occupations, such as "carpentry, hunting, trading and tailoring in the order of predominance among male farmers, and trading, weaving and tailoring among the females." If male occupations earn more than female, I wonder if the apparent differences in profits are really caused by a higher imputed male wage, so it looks like own labor has a higher cost. So the questions are: is it that male farmers get more production per hectare or get a higher price for the crops? and is it that male farmers are imputed to have a higher wage or do they spend significantly more time on the crops?

Apata, Folayan, Apata, and Akinlua examine the role of subsistence agriculture in Nigeria following the 1994 structural adjustment. They find that subsistence agriculture played an essential role in mitigating the hunger and poverty that ensued following SAP; that trade openness improves agricultural productivity through technology transfer and increasing the gains to education; however it also reduces demand for local production, shifting farmers into more export-oriented areas but not enough to replace lost GDP; 71% of household and subsistence agriculture never reaches the formal market, in part due to high transaction costs, so most impacts from imports and exports hit the largest 10% of farms. They cite government policy shortcomings (instability, inconsistency, poor implementation, and weak institutional development) for being the primary constraints to growing agricultural productivity for both large and small farms.

Stewards of the Earth

On GMOs, Roman Catholic bishops in Kenya are credited with "taking a new stance," and though it's only a small switch it's surprising to me how many people are against it. What's the new stance? If you're going to starve to death because of famine, it's really much better to eat genetically modified food than to die. ... I know, what was the policy before? Death before GMO? And there are people against this!? I think we need to call in Jon Stewart for this one.


On "over"population, I wish there were far more people arguing that babies are not the problem. Here is one argument from Yglesias:

It’s especially mistaken, I think, to try to look at children as a negative environmental externality. The beginning of wisdom here is to note that pollution isn’t “bad for the planet.” The planet is a gigantic roughly spherical chunk of rocks that can easily survive whatever level of greenhouse gas emissions or whatever else we care to pump into the atmosphere. The big picture ecological threat is a threat to human beings, and to the continued existence of ecological conditions that are conducive to human flourishing. Radical population reduction would sharply reduce the quantity of anthropogenic ecological impacts, but to what end? The goal needs to be to reconfigure human activity in order to make it sustainable over a longer time horizon. But sustained human flourishing requires both acceptable levels of ecological impact and also the continued production of new human beings.

On the lowered and falling prospects for jatropha, a new report by Wu and Kant addresses the Indian and Chinese largely failed plans:

It appears to be an extreme case of a well intentioned top down climate mitigation approach, undertaken without adequate preparation and ignoring conflict of interest, and adopted in good faith by other countries, gone awry bringing misery to millions of poorest people across the world. And it happened because the principle of “due diligence” before taking up large ventures was ignored everywhere. As climate mitigation and adaptation activities intensify attracting large investments there is danger of such lapses becoming more frequent ...

On the land grab, there is a new film out attacking the primary banana corporation in Cameroon. Among the interesting political economy issues:

"If you look at the congressman of the region, he is also the director of public relations of the company, the minister of trade of Cameroon is also president of the board of directors of the company."

An interesting paper showcases informal seed exchange between farmers for preserving seed diversity in Mozambique following a disaster. They argue food aid should include local seed varieties as part of the package to speed diversity recovery following a disaster.

The research established that nearly 90% of the farmers in the affected areas received cowpea relief seed immediately after the back-to-back calamities. Two years after, only one-fifth of the recipient farmers were still growing the seeds, while more than half sourced their seeds from markets. However, this did little in restoring cowpea diversity in the affected communities as the seeds bought by farmers from the market were mostly uniform, coming from other districts that grew just one or a few select varieties. 
On the other hand, about one-third of the affected farmers obtained seeds from friends and relatives living within the same or neighbouring localities to restock their farms – the same people that they have been exchanging seeds with prior to the disasters. This practice was the main reason why cowpea diversity was restored in these areas, the study showed.

A few monetary thoughts

I just read through Hamilton, Pruitt, and Borger's new piece in the AEJ:Macro. They come up with a method for estimating people's daily expectations both of economic outcomes and Fed policy. Sadly, they stop just short of the recent financial crisis. That would really have been the most interesting use: to see how people's expectations of Fed responses adjusted during the crisis. Ah well. Their more modest results for the 1994-2007 show that people do not expect the Fed to react as quickly to changing economic news but that when it does react, the reaction will be larger. Putting the two together makes the Fed's gradual policy changes destabilizing.

Quantitative Easing in the Great Depression - Five Second Beckworth

This QE program was put in motion by FDR telling the public he wanted to return the price level to its pre-crisis level.  In other words, FDR was signalling a price level target.

Among the measures taken were a devaluing of the price of gold from $20.57/ounce to $35.

Ryan Avent recently summed up QE2 very nicely.  He said QE2 changed the direction of monetary policy, but it didn't set the destination.  That is the problem.

Sumner added: QE did start in 1932, but Hoover opposed dollar devaluation and didn't set a higher price level target. Hence the policy was not credible. … The Fed was worried about inflation by 1936, and raised reserve requirements. Perhaps that could be viewed as an "exit strategy." This policy was similar in spirit to the IOR program. The Fed has indicated they might raise IOR as an exit strategy. And yes, the zero bound problem existed throughout much of this period, with T-bill yields near zero.

Romer’s wonderful analysis of what it means to have a “strong” dollar, recommended to me by economists on both the left and the right (yes, this is old, but I've been out for a while)

Lit in Review: Food Demand -- Ethiopia and Speculators

K. Tafere, Taffesse, and Tamiru, with N. Tefera and Paulos, (2010) “Food Demand Elasticities in Ethiopia: Estimates Using Household Income Consumption Expenditure (HICE) Survey Data), IFPRI and EDRI, ESSP2 Discsussion Paper 011.

One of the difficulties of working with Ethiopian food data is that there are four staple cereals: wheat, maize, teff, and sorghum. Another difficulty is that this means there are a lot of zeroes in the data: 28 percent consume no sorghum, 22 percent no teff, 16 percent no maize, 9 percent no wheat, and 2 percent no animal products.

They come up with a fairly large group of significant own-price and expenditure elasticities (90% of the 230 possible price effects are significant). Most commodities are own-price unitary elastic, though maize (-.75) and sorghum (-.66) are the furthest from -1 and wheat closest (-.98) of the major cereals. Cross-price elasticities are relatively small, with complementarity between teff-sorghum and maize-sorghum, but substitution between teff and wheat. Own-price elasticities appear to be the same in urban and rural areas, but there are different cross-price effects.

Hailu and Weersink, “Commodity Price Volatility: The Impact of Commodity Index Traders,” CATPRN Trade Policy Brief 2011-04

While both sides agree that there is a correlation between CIT (commodity index trader) activity and commodity futures prices, the direct of causation is the point of contention. The empirical evidence is mixed with very limited support for the view that higher commodity prices draws in investment activity by index funds. … There is more empirical support for the claim that CITs are associated with greater market volatility. Khara in a Brookings report argues it is unpredictable price volatility that is the real problem for producers, consumers and governments, not the level of prices. … Thus, an increase in commodity market volatility may lead to greater costs for managing risk: more costly insurance premiums, higher options premiums, and greater margins for hedging. … The research conducted to-date suggests commodity index traders had little to do in driving prices upward but are one of the reasons for the significant increase in market volatility over the last several years, but are not the sole cause.

Lit in Review: Child health

An excellent natural experiment: the electricity was cut from Zanzibar for 4 weeks in May, 2008. Families who had just gotten pregnant and wouldn’t have known about it yet wouldn’t have done anything to change their behavior, but families who did know they had a pregnancy would adapt behavior to safeguard the mother’s and child’s health. As a result, women who knew they were pregnant delivered babies within the usual distribution for Zanzibar, while women who had not known were 11% more likely to give birth to children with low birthweight, according to a new paper by Burlando. Food prices hadn’t changed. Also interesting is that there was a increase in babies born 9 months after the blackout (also about 11%). Friedman particularly highlights the long-lasting effects of temporary shocks.

Vasilakis also has a new working paper on poverty and child malnutrition, using an overlapping generations framework to generate malnutrition-induced multiple equilibria and poverty traps. He models several different World Food Program policies. In his model, a school feeding program “locks” poor countries into a poverty trap by increasing fertility and lowering human capital, but the country could escape. A school feeding program increases efficiency and human capital accumulation in middle-income countries. WFP food price subsidies or investments in local agriculture and food industry allow poor families to increase human capital in their children and increase incomes, helping the country out of poverty. Clearly the body is buried in the adopted and adapted Becker model of fertility decisions (parents face a quantity/quality tradeoff). Since my read of the literature has made me skeptical of the fertility model, I end up skeptical of these results, but the rest of the set up (2 period OLG with poverty traps) is quite interesting.

Glewwe, Park and Zhao (HT:MR) have a work in so much progress there are still notes from the authors to each other in the pdf: 

after one year, making eyeglasses available increased average test scores by 0.09 to 0.14 standard deviations (of the distribution of the test scores). For those students who accepted the glasses, average test scores increased by 0.12 to 0.22 standard deviations….

Cowen asked who refused the glasses and why. About 30% of the children who were eligible were not outfitted. “The stated reasons for not accepting them are not very informative, the two most common reasons being 'child refused' and 'parents refused.'” Running some simple regressions, acceptance is correlated with eyesight (worse eyesight means more likely to accept), already having eyeglasses (more likely to accept a new pair), “children of schoolteachers 22.4 percentage points less likely to accept eyeglasses, and children of party cadres 35.2 percentage points less likely to accept them”, and higher income towns were more likely to accept.