The current doctrine in monetary policy is that central bank need to be very clear about their policy rule so that economic agents can form good expectations about the future path of interest rates and inflation. Whether this communication policy can be questioned, at least from anecdotal evidence, as many people are currently convinced that inflation is currently close to double digits and we are heading towards hyperinflation. But that is only anecdotal. There is better evidence, from the Michigan Survey on Consumers, which ask questions about expectations of future economic conditions.
Carlos Carvalho and Fernanda Nechio ask whether those expectations are consistent with the Taylor Rule that underlies much of monetary policy (at least when the nominal interest is not bound by zero). It turns out that by and large, they are, expect for those with lower education. Surprisingly, the Survey of Professional Forecasters yields less consistent predictions of interest rates and inflation, as if those professional were not believing in the Taylor Rule. It is rather puzzling that the public knows better the monetary policy than the professionals, or is it that the Fed manages to fool the general public, but not the forecasters?
On the advantages of hiring undocumented workers
There is a long standing debate in the United States about undocumented workers, and a more recent one in Europe as well. The debate is on two fronts: the public services they receive without paying taxes (in most cases), and the jobs they take away from local and the resulting pressure on local wages. In the second case, an easy solution would be for firms to stop hiring undocumented workers. But the incentives are not aligned for that, unless one puts prohibitive fines on firms doing illegal hiring.
Indeed, David Brown, Julie Hotchkiss and Myriam Quispe-Agnoli find, using administrative data from Georgia, that such firms have a competitive advantage over those the do not hire undocumented workers, or fewer. This advantage translates into a much higher survival rate, especially for little diversified firms requiring low-skilled workers. This looks like a prisoner's dilemma: if your competitor hires illegals, you have to as well, and vice-versa. But you would both be better off without, as there are legal ramifications.
Maybe those legal ramifications need to be trumped up. Indeed, the advantage of hiring illegals is often that they are willing to undercut minimum wages or various benefits legal workers have rights to. One way to avoid this this is to give illegal workers the same rights as legal workers, as I have argued before. This is actually in the interest of documented workers, as there is then less demand for undocumented workers.
Indeed, David Brown, Julie Hotchkiss and Myriam Quispe-Agnoli find, using administrative data from Georgia, that such firms have a competitive advantage over those the do not hire undocumented workers, or fewer. This advantage translates into a much higher survival rate, especially for little diversified firms requiring low-skilled workers. This looks like a prisoner's dilemma: if your competitor hires illegals, you have to as well, and vice-versa. But you would both be better off without, as there are legal ramifications.
Maybe those legal ramifications need to be trumped up. Indeed, the advantage of hiring illegals is often that they are willing to undercut minimum wages or various benefits legal workers have rights to. One way to avoid this this is to give illegal workers the same rights as legal workers, as I have argued before. This is actually in the interest of documented workers, as there is then less demand for undocumented workers.
Increasing public debt is a consequence of financial liberalization and inequality
The current debt crisis is the culmination of a long process of public debt accumulation over the last three decades in developed economies. Why this trend? I do not think it has suddenly become fashionable for governments to go deeper in debt, or that suddenly we came up with policy prescription leading that way more than before.
Marina Azzimonti, Eva de Francisco and Vincenzo Quadrini think it has to do with financial liberalization and globalization. The fact that more financial instruments and opportunities are now available certainly must contribute. There is already considerable evidence that the emergence of new borrowing instruments has increased household borrowing in the US, in particular for unsecured debt (credit cards). What these authors show is that a key component in the endogenous increase in public debt is a concurrent increase in income inequality in a political equilibrium. Public debt is beneficial because allows intertemporal smoothing. But at some point, higher debt leads to interest rates too high for the good of a majority. Interestingly, the model shows that it is not necessary for inequality to increase in all countries for this to happen. Globalization leads to a world-wide market, and local interest rates are largely determined on that market.
Marina Azzimonti, Eva de Francisco and Vincenzo Quadrini think it has to do with financial liberalization and globalization. The fact that more financial instruments and opportunities are now available certainly must contribute. There is already considerable evidence that the emergence of new borrowing instruments has increased household borrowing in the US, in particular for unsecured debt (credit cards). What these authors show is that a key component in the endogenous increase in public debt is a concurrent increase in income inequality in a political equilibrium. Public debt is beneficial because allows intertemporal smoothing. But at some point, higher debt leads to interest rates too high for the good of a majority. Interestingly, the model shows that it is not necessary for inequality to increase in all countries for this to happen. Globalization leads to a world-wide market, and local interest rates are largely determined on that market.
Why do people let life insurance policies lapse?
Life insurance is complex matters, and some say this is why you need the visit of an insurance salesman to understand the policy option (and other say this is to trick you into paying too much). But it is true that people sometimes make pretty stupid choices with their life insurance. One of them is to lapse their policy: stop paying their premium. The reason this is stupid is that policies are front-loaded: as risk of death increases with age but premiums are constant, a policy holder pays more than an actuarially fair rate during the first years and is rewarded in the later years. A lapsing policy is thus pure profit for the insurance industry, and it is factored in in premium calculations.
Hanming Fang and Edward Kung report that all this is now subject to upheaval due to the emergence of the life settlement industry, which takes policies about to lapse over, pay cash to the holder and continue paying premiums to the end of the policy. Because of the lack of lapsing profits, life insurance companies thus do have to increase premiums or leave the market. The latter would probably mean a loss of welfare for households. But the cash payment may be a welfare improvement, depending on the circumstances of lapsing. If it is because a policy holder lost interest in leaving a bequest, welfare is lower because he does not really need the cash plus faces insurance reclassification risk. If it is because of an income shock, then a cash payout is of course welfare improving.
Fang and Kung study how the life settlement industry should be regulated to maximize household welfare, under the constraint that one cannot observe why a policy holder is lapsing the life insurance policy. They try to find whether one or the other shock dominates and thus which way welfare would go. For the old policy holders, who are the huge majority, it appears the no shocks emerges as more important, thus they do not really have an answer.
Hanming Fang and Edward Kung report that all this is now subject to upheaval due to the emergence of the life settlement industry, which takes policies about to lapse over, pay cash to the holder and continue paying premiums to the end of the policy. Because of the lack of lapsing profits, life insurance companies thus do have to increase premiums or leave the market. The latter would probably mean a loss of welfare for households. But the cash payment may be a welfare improvement, depending on the circumstances of lapsing. If it is because a policy holder lost interest in leaving a bequest, welfare is lower because he does not really need the cash plus faces insurance reclassification risk. If it is because of an income shock, then a cash payout is of course welfare improving.
Fang and Kung study how the life settlement industry should be regulated to maximize household welfare, under the constraint that one cannot observe why a policy holder is lapsing the life insurance policy. They try to find whether one or the other shock dominates and thus which way welfare would go. For the old policy holders, who are the huge majority, it appears the no shocks emerges as more important, thus they do not really have an answer.
The perpetual lag of macroeconomics teaching
When it comes to teaching, nobody likes revamping lecture notes and reforming a curriculum. This is especially true when one is oneself not really conversant in the new material. While I think a Economics PhD should be able to teach almost any undergraduate Economics class, one is still drawn to the path of least resistance and teach only what one knows, even when this is outdated. One consequence of this is that undergraduates get to learn what the profession discredited sometimes decades ago. Nowhere is that more true than in Macroeconomics, which went through a transformation in 1970's and 1980's that to a large extend shelved IS/LM, yet the latter is still the core of undergraduate teaching. The fact that those teaching this today were taught IS/LM is the prime reason, and the textbook writers accommodate this.
Some have called current macroeconomic theory wrong with the current crisis and thus there would be the need to a change in research paradigm and thus also teaching. I am not sure about this claim, I would rather call macroeconomic research before the crisis incomplete rather than wrong. As to the teaching reform, that will take ages. One way to the someway fix the broken IS/LM model to make it more amenable to current events, like Peter Bofinger tries by introducing involuntary unemployment that does not necessarily come from wage rigidity. There have been other such attempts, but frankly, they just make the model even less believable and impossible to teach. The true reform should be to drop IS/LM entirely from the undergraduate classroom, except for History of Economics classes.
Some have called current macroeconomic theory wrong with the current crisis and thus there would be the need to a change in research paradigm and thus also teaching. I am not sure about this claim, I would rather call macroeconomic research before the crisis incomplete rather than wrong. As to the teaching reform, that will take ages. One way to the someway fix the broken IS/LM model to make it more amenable to current events, like Peter Bofinger tries by introducing involuntary unemployment that does not necessarily come from wage rigidity. There have been other such attempts, but frankly, they just make the model even less believable and impossible to teach. The true reform should be to drop IS/LM entirely from the undergraduate classroom, except for History of Economics classes.
Religion and the quality of public institutions
It is now well established that good institutions are crucial for a healthy economy. But you do not create good institutions with a magic wand, and they do not export well from one country to the next. So what makes good institutions? For one, former colonial masters matters, in particular former English colonies tend to have better institutions than other former colonies. At least for those countries, the origin of the legal system matters. For more developed economies, this is less obvious.
Niclas Berggren and Christian Bjørnskov find that religiosity, as measured by how important religion is in daily life, has an impact on institutional quality, especially in democracies. A negative impact. This seems to indicate that religion has some devious implications on the democratic process. How still needs to be established, though, but seeing how churches try to influence the political process, especially by getting poor people to vote against their interests, that does not surprise me too much.
Niclas Berggren and Christian Bjørnskov find that religiosity, as measured by how important religion is in daily life, has an impact on institutional quality, especially in democracies. A negative impact. This seems to indicate that religion has some devious implications on the democratic process. How still needs to be established, though, but seeing how churches try to influence the political process, especially by getting poor people to vote against their interests, that does not surprise me too much.
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