Friday, December 27, 2013

What Makes a Credible Minimum Wage Study?

A study released earlier this year by the University of California's Institute for Research on Labor and Employment takes a nuanced view of recent studies which have been published about the labor-market effects of the minimum wage. 

Because minimum wage policy has recently become a highly-contentious policy issue in both the US and Europe, the academic debate has also intensified, with much of the discussion focusing on the underlying empirical methodology to be used for examination of the minimum wage. At stake is the accurate determination of the effect of minimum wage policy. 

The study considers use of spatially-related control variables to be essential, due to both structural and cyclical differences between and among states, cities, regions, and counties. A valid minimum wage study should also, according to the authors, differentiate between different segments of the labor force and should be able to measure actual effects on wages of minimum wage statutes. Overall, labor-market heterogeneity is not taken into effect as much as it should be. Failure to do so can and has clouded empirical results in minimum wage studies.

We assess alternative research designs for minimum wage studies. States in the U.S.with larger minimum wage increases differ from others in business cycle severity, increased inequality and polarization, political economy, and regional distribution. The resulting time-varying heterogeneity biases the canonical two-way fixed effects estimator. We consider alternatives including border discontinuity designs, dynamic panel data models, and the synthetic control estimator. Results from four datasets and six approaches all suggest employment effects are small. Covariates are more similar in neighboring counties, and the synthetic control estimator assigns greater weights to nearby donors. These findings also support using local area controls.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Saturday, October 19, 2013

OXFAM: Austerity Failed in Africa, Latin Am, Asia. Europe No Different

Last month, Oxfam published a scathing report comparing Europe's post-2008 austerity policies, to those imposed by the IMF on Asia, Africa, and Latin America in the 1980s and 90s. While austerity in Europe have been guided by a certain naivete and blissful ignorance regarding the details and outcomes of austerity politics and structural adjustment in Asia, Africa and Latin America, the reality on the ground is that austerity programs in Europe, as in Asia two decades ago, have begun dismantling the very mechanisms responsible for reducing inequality and promoting stable, sustainable economic growth. Results were rising poverty and stagnant growth. 

As a result of austerity measures, Europe has begun seeing similar results, including slowest growth of all of the world's major economic regions, and slowest crisis recovery. Deficits have also risen as a percentage of GDP due to economic contraction. Moreover, according to Oxfam, European countries are suffering record levels of long-term and youth unemployment. Nearly one in ten working households in Europe now lives in poverty. Effects are most severe in countries that have undertaken the most aggressive spending cuts. Much like in the developing world, the dismantling of social cohesion has also lead to a rise in unrest in Europe. After policy failures in Asia and Latin America, traditional leading proponents of austerity in the developing world, the IMF and World Bank, have begun to formally recognize that austerity has stunted both economic growth and equality in much of the developing world. Unfortunately, it appears that Europe's policy circles failed learn that lesson from events in the developing world.

The Oxfam report makes policy recommendations focusing on investment in human capital development, expansion in public services, strengthening of institutional democracy and tax reform aimed at counteracting tax avoidance, as well as establishing a more progressive tax code. 

European austerity programmes have dismantled the mechanisms that reduce inequality and enable equitable growth. With inequality and poverty on the rise, Europe is facing a lost decade. An additional 15 to 25 million people across Europe could face the prospect of living in poverty by 2025 if austerity measures continue. Oxfam knows this because it has seen it before. The austerity programmes bear a striking resemblance to the ruinous structural adjustment policies imposed on Latin America, South East Asia, and sub-Saharan African in the 1980s and 1990s. These policies were a failure: a medicine that sought to cure the disease by killing the patient. They cannot be allowed to happen again. Oxfam calls on the governments of Europe to turn away from austerity measures and instead choose a path of inclusive growth that delivers better outcomes for people, communities, and the environment. 
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Saturday, May 18, 2013

ROI & The Economic Importance of Public Support of Scientific Research

Last month, academic advocate Zack Kopplin debated the importance of maintaining funding for scientific research, even in the face of other economic priorities. Kopplin argued that the Return on Investment reaped from the results of such research far outweigh both any costs associated with said research, and borrowing costs. 

Stephen Moore, a former fellow of both the Heritage Foundation and the Cato Institute, two prominent Washington DC-based free-market think-tanks provided the counter-point to Kopplin's argument. While at first arguing that the debt takes precedent over scientific funding, Moore resorted to mocking Kopplin's views via anecdotal mention of publicly-funded research on snail mating habits. "You are not a scientist" responded Kopplin. The host then chimed in to say that anecdotal arguments really have no place in a serious policy debate. 

We can all bring up anecdotes which, while not scientific, representative, typical, underline one's point of vies in the argument. In response to Moore's mention of funding for snail mating habits, I can also submit seemingly questionable research: on Oyster Glue.

2013 Story About Research on Oyster Glue
2010 Story About Research on Oyster Glue

For the past 13 years, research has been ongoing at Indiana's Purdue University, on exactly how Oysters, Mussels, Barnacles and other mollusks glue themselves to underwater surfaces. If this research doesn't seem relevant to society overall, think again. 

Although oyster glue research seems unorthodox, this research may very well yield an organic non-toxic glue, which can be used as an underwater construction material, or even to glue broken bones still inside a patient's body. From the economic point of view, the potential returns are enormous. So, we all have our anecdotes.

All jokes and anecdotes aside, the link between support for scientific research, and future economic growth is enormous, and simply cannot be downplayed or overlooked. 
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Sunday, May 5, 2013

LSE Study: Self-Fulfilling Crisis of Eurozone Sovereign Debt

In an empirical study on Eurozone sovereign debt published at LSE and at CEPS, an EU-financed economic policy think tank, has found definitive evidence of the fragility of Eurozone-member-nation debt vis-a-vis non-eurozone EU debt. In particular, the study finds that aggressive growth in Eurozone sovereign bond spreads since 2010 have been generally disconnected from key market fundamentals. Just outside of the Eurozone meanwhile, standalone countries have faced a much lower degree of sovereign bond volatility, despite having similar Debt-to-GDP ratios as their Eurozone counterparts.

What this all means is that the credibility and competence of the European institutions behind the Euro, are being called into question by the market, as panicky investors flee the Eurozone, and countries that are hit by the resulting liquidity crises are forced apply stringent, recession-causing austerity measures. While Greece had indeed accumulated an unsustainable Debt-to-GDP ratio, other Eurozone countries that were hit by the crisis had Debt-to-GDP levels, which were certainly not worse than the of the US and the UK. What is needed, LSE argues, are pro-liquidity policies aimed at preventing the spread of sovereign debt liquidity polices from one country to the next. Exactly the sort of the thing Merkel and her henchmen are against.

The study's main author, Professor Paul De Grauwe, a former Belgian senator, is widely considered to be Belgium's most renowned economist 

We test the hypothesis that the government bond markets in the Eurozone are more fragile and more susceptible to self -fulfilling liquidity crises than in stand -alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries in the Eurozone during 2010-11 was disconnected from underlying increases in the debt to GDP ratios and fiscal space variables, an d was the result of negative self -fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the Eurozone into bad equilibria. 

We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the Eurozone, and reacted by raising the spreads. No such worries developed in stand -alone countries despite the fact that debt to GDP ratios and fiscal space variables were equally high and increasing in these countries. 

Paul De Grauwe is a Professor in European Political Economy and head of the European Institute at the London School of Economics. He is also professor emeritus in international economics at KU Leuven and former member of the Belgian Federal Parliament.

Monday, April 22, 2013

US Congressional Study: Is Copyright the Free Market at Work?

In November 2012, the Congressional Republican Study Committee briefly launched - and subsequently retracted - an ideologically-unusual study casting skepticism on the state of American intellectual property law. While the study focuses on Copyright law, its conclusions are valid for intellectual property law at large. Overall the, the study challenges three standing ideas about IP law. 

1. The purpose of copyright is to compensate the creator of the content:
According to the study, purpose of the copyright system is to “promote the progress of science and useful arts.” IP law is supposed to incentivize innovation. To the extent that IP law fails to do so -as  has been the demonstrable case in the IT industry- IP law is not fulfilling its constitutionally-intended purpose. 

2. Copyright is free market capitalism at work:
In fact, IP law currently entitles the IP holder to a guaranteed, state-enforced monopoly. The retarding effect of this on the progress of economic growth cannot be overstated. 

3. The current copyright legal regime leads to the greatest innovation and productivity:
This echoes the claims many of economists who conclude that current IP stifles innovation and encourages rent-seeking, while interfering with productive participation in the economy as new information is systemically prevented from ever entering the public domain. Productive parties must deal with hampered access to useful knowledge, even decades after the initial discoveries.   

Ruffled Feathers
Responding to protests from congressional Republicans, the RSC removed the brief from its website in less than 24 hours and fired Derek Khanna, the study's constitutional strict-constructionist author. Khanna, a Yale Law Fellow, has subsequently become a contributor for Forbes. 

What Can Be Done?
A package of solutions was also proposed by the study. Currently, US has no disincentive against bogus IP claims, which do not actually have innovation behind them (such as attempts to copyright or patent traditional, folkloric knowledge). This could be reformed. Fair Use should also be expanded, and damages awarded for infringement should also be reformed. These measures would serve to discourage anti-competitive patent-trolling. 

The most significant reform that Khanna proposes, is to limit the length and renewability of IP protection, restoring IP protection to the competition-favoring, industrial-revolution-era version of itself. 
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Friday, March 29, 2013

Warren and Bernanke on Addressing Too Big to Fail in US Banking Sector

During a hearing of the Senate Banking Committee on February 26, Senator Elizabeth Warren interviewed Federal Reserve Chairman Ben Bernanke on the status of the US' largest banks. The central topic of the discussion was the "Too Big To Fail" issue. According to Warren, the TBTF  problem has actually gotten worse since the crisis began. Bernanke, agrees with the specification of TBTF problem. The plan apparently is to develop institutional mechanisms by which America's large systemic banks can be wound-down, should they fail. 

TBTF is toxic to the incentive structure underpinning a well-working financial market because it creates expectations that banks and other economic actors which are large enough to be systemic to a country's economy, and whose collapse would cause severe negative knock-on effects, making the consequences of bank failure disastrous to the economy as a whole. Market expectations are therefore, that the state would bail the banks out in case of failure, thereby dis-incentivizing prudent risk-management within the largest banks.

According to empirical research conducted by the Federal Reserve, banks are willing to to pay billions in added premiums associated with M&A costs in order to acquire TBTF status. What this should tell us is that American banks are definitely able to detect economic rents from becoming so large. 

This paper examines an important aspect of the “too-big-to-fail” (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders’ wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.