Category Archives: economic growth

How to keep the American Dream intact?

The Equality of Opportunity Project is an impressive research venture using big data to explore new pathways to upward mobility in the American society. One of the pictures that came out of this project and that has made quite a few rounds of tweets is the following one: project_abs_lato

It shows the percentage of children earning more than parents over the years according to when a child was born. So if you were born in 1940 there was higher likelihood for you to earn more than your parents than if you are child born in 80’s. It is a very interesting data in itself and the paper itself makes an interesting read. (alternative link here)

I think this measure of the fading American dream provides an incomplete narrative of what might be happening in the US today. Given, that per capita incomes were much lower in 1940s compared to today and that economic growth rate measured by growth in per capita real GDP has stayed constant over this period at 2 percent per year (see graph below), it seems obvious that children born later would face a lower probability of doing better than their parents than children who were born in earlier decades.

fredgraph

I think the story of decline in absolute mobility is invariably linked with the nature of growth process in the US. Today there is an unprecedented increase in the skill requirement on an average to produce 1 unit of real GDP than in 1940s. Also, aging population means that there are less people who can acquire those skills. If this is coupled with a simultaneous rise in required time for skill accumulation, then at any given point in time we might see an increase in the proportion of people working part time reducing the probability of earning more than your parents. See Acemoglu and Autor’s Handbook chapter for skill biased technological change and its impact on the US labor market.

When looked at in conjunction with these changes in the American economy, we get some interesting policy implications.

  1. One, there should be more spending on education- given the importance of ideas for economic growth in future, the case for education having diminishing returns is already weak.
  2. Second, have more skilled people come in through immigration-directly as workers or indirectly as students- which can help increase the size of economic pie while people born in the US get the required time and money for education.
  3. Third, there should be a change in the way we approach education in order to foster life long learning capabilities in those being educated.
  4. Fourth,  Redistribution-More public spending on education also means more redistribution, something that the paper finds reverses the decline in probability of earning more that your parents.

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Gender equality and economic growth

Despite the past and current social reform movements across the globe for gender equality, there still seems to be significant resistance to it as suggested by differences in male and female labor force participation rates. So in case you are still a closeted feminist, here is an economic argument to help you come out:

For a sample of Asian countries, Kim, Lee and Shin (2016) find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market.

In addition to the calibration and simulation exercises to estimate the macroeconomic impact of removing gender inequality, the data in the paper highlights some other aspects of the gender inequality puzzle. For example, in almost all the Asian countries studied in the paper, females have higher average years of schooling than men. Yet the male labor force participation rate seems to be way higher than the female labor force participation rate. So why is this the case? What factors shape the distinct incentives that females and males face to participate in the labor market? I think these questions also are good research questions in themselves.

As an aside: Female and male labor force participation rate for China are 75% and 85% respectively while there is hardly any difference between average schooling at 8.1 and 7.3 respectively. As there is a frequent comparison between India and China, it might be worthwhile to see how Indian numbers compare to these. The average years of schooling for females and males in India is 7.59 and 4.81 respectively while the female and male labor force participation rate is 30.3% and 83.1% respectively. So not only that an average Chinese male is twice as educated than an average Indian male but the female labor force participation rate in China is more than double that in India. So any suggestions about India overtaking China anytime soon have to be taken with a fistful of salt!

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Filed under economic growth, gender, labor markets, macroeconomics, social perspectives

NBER Summer Institute

An interesting and informative summary by John Cochranne of NBER summer institutes on Economic Fluctuations and Growth and Asset Pricing.

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Filed under current economic issues, economic growth, Macroeconomics and the crisis

ASSA 2014 Highlights

Despite the awful arctic cold wave, attending ASSA 2014 in Philadelphia was a delight as it is every year! The sheer amount of energy and enthusiasm that comes from such a large professional gathering is really unparalleled. Economists also seem to be getting better at entertaining themselves, if this year’s music and humor sessions are any indicator. But most off all, for me, the highlights were AEA/AFA luncheon with the recent Nobel Laureates Ms. Fama, Shiller and Hansen 🙂 and continuing education series on Economic Growth.

Due to illness, Fama could not actually make it to the luncheon but he was ably represented by his long time coauthor Ken French. The conversations were well facilitated by Luigi Zingales of Chicago Booth. Some interesting highlights:

On bubbles: There is nothing called as bubbles- there is only volatility in asset prices.

Take on market efficiency: Bob Shiller thinks that efficiency of markets is only half truth but nonetheless a very significant one. Hansen responded by saying that the function of financial markets is aiding resource allocation in the economy. Hence, the more important question is about its role in promoting allocative efficiency. This, according to me, is one of the clearer statements of how economists should look at the process of financial intermediation.

While elaborating on the half truth comment, Shiller, who came across as an extremely soft spoken yet a very candid speaker, said that any profession should be wary of ‘group think’. This refers to the blind spots that professionals develop to obvious gaps in understanding a phenomenon as more and more people buy into the dominant thinking framework. That was a very interesting point.

Optimal Investment Strategy: If markets cannot be predicted, what should be the optimal investment strategy? According to Shiller, people should seek advice from paid professionals and there should be more of them available.

The second interesting session I attended was ” What Macroeconomists should know about finance?”. It was a panel discussion constituted by Markus Brunnermeier, Atif Mian, and Arvind Krishnamurthy. Some interesting points about macro-finance linkages that were made in this discussion were as follows:

1. Atif Mian: Debt matters for macro aggregates through:

  • Asset Price Channel: asset prices declined faster in states where foreclosure laws are laxed.
  • Aggregate Demand Channel: HH that suffer higher net wealth shocks cut back on spending. Higher level of leverage means that aggregate losses are going to be shared by levered households disproportionately. Decrease in demand leads to reduction in tradable and non tradable jobs.
  • Financial Rigidity Channel: absence of state contingent debt. Rigidity in financial contracts. Hence, important question is why are private contracts not optimal from macro perspective.
  • Endogenous risk = systemic risk

2.  Arvind Krishnamurthy:

  • Multiple asset prices- Do not respond in synchronous manner.
  • Careful thought to Intermediary asset pricing is needed.
  • Market segmentation: Importance looking at process of intermediation for macro.
  • Changes in risk premia are not included in standard macro.
  • Capital structure of financial firms is not irrelevant as macro assumes.

3. Markus Brunnermeier: Unfortunately I missed this presentation-I definitely blame it on cold weather 😉

The best part was the continuing education series on economic growth. Oded Galor and David Weil did an extremely good job of summarizing the existing research, commenting on intricacies of research designs and giving a clear picture of what we know about economic growth till now. Further, Galor’s Unified Growth Theory is a sure winner according to me. His paper on genetic diversity and comparative economic development was supremely exciting! You can access his research from his IDEAS page. You can access David’s research on health and economic growth here.

Update (January 11, 2014): Not sure why and how I missed this- Claudia Goldin’s Presidential address tops everything-you can watch it here.

Update (January 19, 2014): Interesting presentation on Railways and Famines in India. Check it out here.

 

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