Compared to two centuries ago, today's world is much different, as the standard of living has dramatically increased, along with population. This has been in strong contrast with previous history, characterized by growth close to zero in both population and the standard of living. During this period, there has been a very strong demographic change, called Demographic Transition, with a large decrease in mortality followed by a decrease in fertility. This has implied that every country that went (or still goes) through this transition has a period of high population growth while mortality is low and fertility has not yet declined. Such major shift in demographics have large implications, but it is also important to understand what triggered the Demographic Transition, especially as some countries are now just at the start of it.
Oded Galor tries to disentangle to various triggers that have been proposed. As this is a dynamic process, obviously some triggers are going to be more important at different stages of the transition. There is too discussion in the paper about the various theories and the quantitative evidence for and against them for me to summarize it efficiently here. Galor concludes that the following theories hold water when plunged into the data: First there is the theory that the higher demand for human capital during industrialization lead to a decline in fertility as parents concentrated more on the quality of their children rather than their quantity. Second, as the wage gap between females and males decreased, the increase in female labor force participation and the associated higher opportunity cost of having children for mothers reinforced the decrease in fertility.
What is important here are the theories that did not passed the test of the data according to Galor: the theory that the emergence of financial markets made in less necessary for parents to have been adult children to support them in old age; the theory that a decline in mortality lead to a too high number of surviving children; and the theory that the general increase in income lead to a rising opportunity cost of raising children.
More on the credit card puzzle
Why do people simultaneously hold substantial cash and high interest credit card debt? I previously reported that this could be explained by the demand for liquidity as some goods cannot be purchased on credit. While that explanation seemed to be a good one quantitatively, it does not mean that thtere is no room for other ones as well.
Scott Fulford offers another one: liquidity is necessary for unexpected changes in borrowing limits. Basically, people keep cash or savings so that they have something to live from in case their credit line gets unexpectedly reduced. That seems to be a very poor strategy, though. Given the high interest rate on credit cards, why not lower the credit balance with those savings? You pay less interest, and you end up with exactly the same balance when you are the most constraint. If fact you are even better off in the latter situation, because past interest payments are lower and the balance is thus lower. The reason why household in this model still hold cash is that there is a very peculiar way in which the debt limit is stochastic: it is either zero or some fixed number. Thus it is not some reduction in credit lines, it is a complete cancellation out of the blue. That is important for household choices. In fact, this may give some ideas to credit card companies, because this implies that households will want to have high interest credit card debt while having low interest savings. Crazy.
Scott Fulford offers another one: liquidity is necessary for unexpected changes in borrowing limits. Basically, people keep cash or savings so that they have something to live from in case their credit line gets unexpectedly reduced. That seems to be a very poor strategy, though. Given the high interest rate on credit cards, why not lower the credit balance with those savings? You pay less interest, and you end up with exactly the same balance when you are the most constraint. If fact you are even better off in the latter situation, because past interest payments are lower and the balance is thus lower. The reason why household in this model still hold cash is that there is a very peculiar way in which the debt limit is stochastic: it is either zero or some fixed number. Thus it is not some reduction in credit lines, it is a complete cancellation out of the blue. That is important for household choices. In fact, this may give some ideas to credit card companies, because this implies that households will want to have high interest credit card debt while having low interest savings. Crazy.
Should human capital be taxed?
There is a long standing and quite robust result in the literature, originating with Christophe Chamley and Ken Judd, that physical capital should not be taxed. Larry Jones, Rodolfo Manuelli and Peter Rossi extend this reasoning to human capital. These are very strong results that are not borne by the data, thus either the models are missing something, or economists still have a lot of convincing to do.
Christoph Braun challenges the last result on a technicality. Jones, Manuelli and Rossi assumed that human capital exhibits constant returns to scale in its production function, that is, a doubling of current human capital doubles ceteribus paribus future human capital. Braun take the opposite extreme: current human capital has no impact on future human capital, as the latter is only dependent on the time dedicated to education. The first assumption was very convenient, because it made human capital disappear from key equations, but this also drives the no-tax result. The latter makes it simpler than an intermediate assumption (decreasing returns to scale), but give a very different result from the original paper: in particular, the return to human capital does not vanish from the taxation equation and thus should be taxed. However, the accumulation of human capital is encouraged through the tax deductibility of tuition. And in the end, physical capital is still not taxed.
Christoph Braun challenges the last result on a technicality. Jones, Manuelli and Rossi assumed that human capital exhibits constant returns to scale in its production function, that is, a doubling of current human capital doubles ceteribus paribus future human capital. Braun take the opposite extreme: current human capital has no impact on future human capital, as the latter is only dependent on the time dedicated to education. The first assumption was very convenient, because it made human capital disappear from key equations, but this also drives the no-tax result. The latter makes it simpler than an intermediate assumption (decreasing returns to scale), but give a very different result from the original paper: in particular, the return to human capital does not vanish from the taxation equation and thus should be taxed. However, the accumulation of human capital is encouraged through the tax deductibility of tuition. And in the end, physical capital is still not taxed.
Reflections about 10.10.10
Today is October 10, 2010, which is the binary equivalent of 42. I was looking forward to this day, as 42 is the "Ultimate Answer to the Ultimate Question of Life, The Universe, and Everything." Alas, my day was not fruitful in this respect, maybe we have to wait for another century for The Ultimate Answer. And then, the context could be very different, as human life may have few similarities with today's. Just think how life today compares to that of 1910, and how we now ridicule some aspects of everyday life then. If you still follow my train of thought here, what would people a century from now find ridiculous about our lives nowadays? Here are a few candidates, and only the far future will tell whether I am right.
- We drive cars ourselves. How inefficient and, especially, dangerous.
- We can pollute mostly for free.
- Water is essential, yet cheap.
- Nationalism.
- The amount of garbage we generate, in particular paper and plastic.
- Major projects are funded and conducted at the national level: space exploration, fundamental research.
- Smoking tobacco.
- Transportation centered on individual fuel engines.
- How religious people are.
- Circumcision.
- We tolerate a huge dispersion in standards of living across the Earth.
- Life-time insurance contracts between people of the same gender are illegal is many places.
- Private and exclusive health care provision.
- Immigration laws.
- Patents and copyright.
- Intelligent design.
- We kill sociopaths.
- We pay to put drug users in jail instead of taxing them.
- We need new flu immunization every year.
- TV and celebrity oriented leisure.
- That abortion needs to be an option.
- The catholic church can get away with child molestation on a grand scale.
- We use toilet paper and flush with water.
- We devote lots of resources to lawns.
- We prefer pumping expensive carbon into the atmosphere rather than using free solar energy.
- We expect physicians to know everything on the spot without looking it up.
- The USA is a country, while Europe is not one.
- Government officials are poorly paid and are expected to outdo themselves for the common good.
- The right to privacy is somewhat enforceable.
- Lawyers are powerful.
- Prostitution often involves sex.
- One needs to dress well to be respected (artists excepted).
- Few babies with birth defects are born.
- Farmers receive substantial subsidies, sometimes in areas not suitable for farming.
- Many people know how to spell.
- Rogue states.
- Invasive surgery.
- The belief that one needs to exercise to lose weight.
- The waste of time in commuting.
- Chemotherapy.
- We eat animals.
- How bad our lives are.
What makes people save?
The saving behavior of people is heterogeneous, and what drives it is important for policy. In particular, there is a strong belief that people do not save enough, either because they know the state will bail them out in old age or because their intertemporal preferences are not aligned with the social planner. In any case, what drives people to particular saving behaviors?
Henrik Cronqvist and Stephan Siegel use data from identical twins in Sweden and conclude a little bit over everything is contributing. Of course, results will depend on whether people have faced circumstances that make saving difficult. 35% of the differences in saving propensity can be explained by genes, more so for men, educated and wealthier people. Parental influence is stronger when other siblings are present, which the authors interpret as a situation with less competition for parental resources (why? they are also competing for the parents' attention). But all this means there is still 65% of the variation that can be educated. Which is a lot.
Henrik Cronqvist and Stephan Siegel use data from identical twins in Sweden and conclude a little bit over everything is contributing. Of course, results will depend on whether people have faced circumstances that make saving difficult. 35% of the differences in saving propensity can be explained by genes, more so for men, educated and wealthier people. Parental influence is stronger when other siblings are present, which the authors interpret as a situation with less competition for parental resources (why? they are also competing for the parents' attention). But all this means there is still 65% of the variation that can be educated. Which is a lot.
Economic thinking in Bulgaria after the fall of the Berlin Wall
Economic thought, especially in macroeconomics, goes through episodic changes. These changes are very slow to occur, and historians of economic thought try to analyze what brought these changes and how they happened. The recent doctrinal changes in Eastern Europe offer in this respect a particularly interesting exercise, because everything happened very fast. In particular, you did not even have to wait for an old generation to retire or die for fundamental changes to happen.
Nikolay Nenovsky studies, from personal experience, what happened in Bulgaria. The evolution there was particularly dramatic there because the Russian Perestroyka was largely ignored by the political and intellectual class, and thus change had to happen much faster thereafter. Also, the economic transition happened in a theoretical vacuum, as only transition to communism was researched. Subsequently, economic research was largely event driven, reacting to price liberalization, restructuring of state ownership, foreign debt issues and the currency board.
Previous to reforms, economists were in two camps: those who studied socialism, and those who were to point out the ills of capitalism. The latter were much more ready to understand the transition and emerged as intellectual leaders. The first found refuge in Keynesianism and institutional economics. Bur all lacked empirical skills, and, ironically, sociologists took this over. But the big agents of change were the World Bank and the IMF, through their missions and advice, and imported western textbooks. Nowadays, western thinking has been adopted without much discussions about its fundamentals. Microeconomics is largely neo-classical, and macroeconomics mostly Keynesian. The latter is not surprising, given where Bulgaria is coming from.
Nikolay Nenovsky studies, from personal experience, what happened in Bulgaria. The evolution there was particularly dramatic there because the Russian Perestroyka was largely ignored by the political and intellectual class, and thus change had to happen much faster thereafter. Also, the economic transition happened in a theoretical vacuum, as only transition to communism was researched. Subsequently, economic research was largely event driven, reacting to price liberalization, restructuring of state ownership, foreign debt issues and the currency board.
Previous to reforms, economists were in two camps: those who studied socialism, and those who were to point out the ills of capitalism. The latter were much more ready to understand the transition and emerged as intellectual leaders. The first found refuge in Keynesianism and institutional economics. Bur all lacked empirical skills, and, ironically, sociologists took this over. But the big agents of change were the World Bank and the IMF, through their missions and advice, and imported western textbooks. Nowadays, western thinking has been adopted without much discussions about its fundamentals. Microeconomics is largely neo-classical, and macroeconomics mostly Keynesian. The latter is not surprising, given where Bulgaria is coming from.
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