We Are All Ross Levinians Now

So says Kevin Grier:

In my 2007 JDE paper with Mrs. Angus, we documented that the only variables we could find who's temporal evolution was consistent with that of the world income distribution were measures of financial development and of research and development.

In a current project, my co-authors and I are finding that financial development is at least as important as any traditional factor of production in determining the production structure of an economy (no link yet due to picky co-authors! 8^) ).

And, in a current NBER working paper (ungated version here), Arellano, Bai and Zhang argue that financial development can explain a large amout of the variation in performances between firm of different sizes across countries. Here's their abstract:

"This paper studies the impact of cross-country variation in financial market development on firms' financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms' financial structure in the data and show that financial restrictions can account for the majority of the difference in growth rates between firms of different sizes across countries."

We are all Ross Levinians now!

US Defeats China in WTO

The case revolves around US exports of creative property, especially digital media, that China had insisted be distributed through Chinese firms. US firms wanted to offer their products directly to Chinese consumers, and China was clearly in violation of WTO rules by preventing them from doing so. So while this ruling was not surprising, it does speak to a broader friction: China wants the benefits from global trade that membership in the WTO ensures, but does not want to be fully integrated into the global economy: they still want to be able to control what information is available to Chinese citizens. This is obviously more difficult in the internet age, and rulings like this one from the WTO explain why.

Now I'm not saying that giving Chinese citizens the freedom to buy the new Jay-Z/Kanye/Rihanna track direct from iTunes is going to bring down the Chinese regime. But increasing integration into the global economy will bring increasing exposure to outside ideals and influences. China worries that those influences will gradually mutate into popular reformist movements that challenge the Communist Party.

As expected, Emmanuel is already all over this.

U.S.A. v. Mexico

Today at 4 p.m. EDT, the men's national soccer teams of the U.S. and Mexico square off in a World Cup qualifying game at the Estadio Azteca in Mexico City. The U.S. is coming off a thrilling Confederation's Cup campaign where they were throttled by Italy and Brazil before dismantling Egypt and Spain to reach the final against Brazil. The U.S. took a 2-0 lead into the second half of that game before collapsing in the final 15 minutes. This game is important for both teams' chances of qualifying for next summer's World Cup, but it is critical for Mexico. The top three teams from CONCACAF automatically qualify, and while the U.S. sits comfortably in 2nd place Mexico is in 4th. If Mexico doesn't win its home games, the road to the World Cup is made much more difficult.

Since the Confederation's Cup, Mexico beat the U.S. 5-0 in the Gold Cup, but that featured none of the likely U.S. starters, and few of the reserves. The U.S. used that tournament to test and evaluate some of their younger, marginal talent; the team that beat Spain and pushed Brazil to the brink is the team that will face Mexico today.

The relevant facts are these: the U.S. has never beaten Mexico in Mexico, and have only managed a draw once. And the Estadio Azteca is one of the most intimidating places in the world to play: 105,000 rabid, abusive fans (officials had to install a barbed wire fence to separate spectators from the players) who hurl insults and objects. They really really REALLY hate the U.S. team, and they expect a win. Perhaps even worse, the Estadio Azteca is 7,350 feet above sea level, and the air is badly polluted. Moreover, Mexico moved the starting time from 7 p.m. to 4 p.m. to take advantage of the oppressive heat. It is impossible to fully acclimate to conditions like those, so conditioning will be key.

So prediction time. I don't see the U.S. winning this match. Mexico needs it too badly and has every advantage pointing in their favor. There are good reasons why the U.S. has never won in Mexico (see preceding paragraph), and despite the fact that the U.S. has recently played the best soccer in their history, they've been inconsistent over the past six months and are fairly evenly matched against Mexico. On a neutral field the U.S. wins, but this isn't a neutral field: the structural factors make this game very difficult for the U.S. to win.

However, the U.S. has recently played the best soccer in their history, and goalie Tim Howard can overcome a multitude of faults. He outclassed Iker Casillas (often mentioned as the best goalie in the world) in the win against Spain, and is now in the top 5 or so goalies in the world (Mexico's Ochoa is also in that conversation). So I predict a 1-1 draw in which Mexico controls much of the game, but the U.S. defense-plus-Howard repels most of the attack and gets a goal on a counter-attack. For this to happen, Coach Bradley must use all three substitutes, and use them wisely. If the team gets gassed at the end -- as they did against Brazil -- Mexico is good enough to take advantage and score a late goal. This should be the starting lineup for the U.S.:

---------------Howard--------------------
Spector---Onyewu---DeMerit---Bocanegra
Dempsey---Bradley---Clark---Donovan
---------Altidore-------Davies------------

Substitutes will depend on whose playing well and who runs out of steam, but I would look for Feilhaber to replace Clark in the 65-70th minute, and Holden to replace Altidore (with Dempsey moving up to forward) around the same time. If the U.S. is leading, then Clark or Ching may replace Davies to hold up the ball and waste time.

No matter the result, it should be a great game. It is televised on Telemundo (Spanish) and Mun2 (English).

The Importance of Accurately Modeling Politics

The World Bank's Private Sector Development blog notes that relaxing labor regulations (i.e. making it easier for employees to hire and fire workers) in Latin America would lead to more employment:

[O]n a net basis, making labor regulations more flexible in most countries will result in a net gain in employment. More workers will be fired, but even more workers will be hired as a result of increased flexibility. Only one country in the study (Nicaragua) would see no net gain, and a number of countries would see large net gains (e.g. Colombia and Paraguay).

So why not do it?

The tricky part is that workers who already have jobs will be naturally opposed to more flexible labor regulations. But there is a better solution than rigid regulations that keep marginal workers out of formal labor markets. As Dave argues, unemployment insurance could go a long way to softening the blow for those who lose their jobs.

At first glance, this seems like a plausible enough compromise, and perfectly in line with what John Ruggie called "embedded liberalism": a system of public institutions that smooth the convulsions of market economies while still retaining the dynamism and incentive structures that make market economies more productive than command economies. Variations of this approach still dominate the mixed systems of the industrialized world even after the collapse of the Bretton Woods system that first inspired Ruggie to coin the phrase.

But it's not clear that there is a direct link between the strength of a social safety net and attitudes towards labor market regulations. In many Western European countries, labor regulations are stronger than those in the U.S. and the safety net is more generous. This leads to dual rigidities in both systems. In much of Europe, workers with good jobs (esp. public sector jobs) tend to never lose them, and potential workers on the dole tend to stay there because their opportunities for employment are rarer and the generous welfare benefits incentivize stasis. In the U.S., easy hiring and firing in most industries leads to a more dynamic system, but less-generous unemployment benefits make transitions more painful and incentivizes workers to take the first job they can get even if it doesn't maximize their skills. So the European model leads to more structural unemployment, while the U.S. model leads to more cyclical unemployment. Both systems sacrifice some productivity in the bargain.

Many Latin American countries have chosen neither approach, instead protecting labor in the hopes that a social safety net won't be needed at all. This is fine if you are fortunate enough to get a good job, but it hurts those who cannot. Not only are the unfortunate often unable to break into the labor cartels, but they are also not protected by a welfare state. In many ways, this is the worst of all worlds. But it isn't clear that a flexibility-for-safety-net bargain is feasible. It will be difficult to persuade workers who benefit from the current system that reform is necessary. After all, most of them will never need a safety net; their jobs are secure in the status quo. Moreover, a stronger safety net will have to be paid for through higher taxation of those currently employed. A campaign platform of "increasing job insecurity + higher taxes" is not likely to garner much support.

In other words, political compromises are not made in a vacuum. The sort of grand bargain envisioned by the World Bank folks may make plenty of sense in the abstract, but only because they assume an unrealistic starting point for negotiations. When one considers the true positions of the parties involved, such a compromise looks almost impossible.

There's a reason why systemic transformations (like a re-organization of labor markets) tend to follow things like major wars and economic collapses: in normal times the status quo is entrenched; after crises there is no status quo. This is not to say that marginal improvements are not impossible in normal times, but major reforms are very difficult to achieve.

Early-Week Link Dump

-- Slavoj Žižek on Berlusconi, Kung-Fu Panda, Iran, and more. Startlingly coherent by Žižek's standards.

-- Does development lead to higher birth rates at some margin? Examining new research in light of old theory.

-- Regulation as a chess game. I believe I posted this link once before, but it's probably the single best (short) piece I've read on regulation written in the past year.

-- The implications for Mexico of the U.S. "War on Drugs".

And a bonus video: Cowen and Wilkinson on Cowen's new book, the importance of neurodiversity, David Hume, and more:

Guess Who Wrote This

I'll bet you can't:

In return, Big Pharma isn't just supporting universal health care. It's also spending a lots of money on TV and radio advertising in support. Sunday's New York Times reports that Big Pharma has budgeted $150 million for TV ads promoting universal health insurance, starting this August (that's more money than John McCain spent on TV advertising in last year's presidential campaign), after having already spent a bundle through advocacy groups like Healthy Economies Now and Families USA.

I want universal health insurance... But I also care about democracy, and the deal between Big Pharma and the White House frankly worries me. It's bad enough when industry lobbyists extract concessions from members of Congress, which happens all the time. But when an industry gets secret concessions out of the White House in return for a promise to lend the industry's support to a key piece of legislation, we're in big trouble. That's called extortion: An industry is using its capacity to threaten or prevent legislation as a means of altering that legislation for its own benefit. And it's doing so at the highest reaches of our government, in the office of the President.

Who do you think? Some liberaltarian? Perhaps one of the anonymous writers of The Economist? One of The Atlantic's econobloggers? One of the Douthat/Salam Third Way Republicans?

Would you believe that it's Robert Reich? It is, and there is more at the link.

One of the major arguments for a government health care program is that the government can use its massive purchasing power to extract cost concessions from private firms. Obama has reiterated this point over and over, and more often couched health care reform in terms of fiscal prudence rather than social justice. That argument is losing more credibility the further along this process goes (the CBO took another bite out of that argument recently). If Obama's plan isn't revenue-neutral, then he has to decide how to pay for it. That means tax cuts or deficits, both of which he has pledged himself against. Something's gotta give.

ht: Lebron

In Defense of Getting Paid for Your Work (if you want to)

John Holbo and Belle Waring of Crooked Timber have written a new introductory textbook on three of Plato's dialogues. In addition to issuing a cheap paperback, they've made the entire book free in two formats: full-screen internet-based flashbook (with animations!), and as a downloadable pdf (download option available at previous link). The authors encourage university instructors to assign the book in their classes, and offer best price -- free -- as an incentive. I've skimmed through it, and it is very good, although I'm not qualified to judge its appropriateness for an introductory philosophy or political theory class.

In any case, I applaud Holbo and Waring for making their work available at zero cost. As does Matthew Yglesias, who says the following:

But it’s definitely true that more academics should be doing this sort of thing—it makes sense for people who are paid to add to the stock of human knowledge to be doing as much as possible to disseminate said knowledge.

Maybe they should and maybe they shouldn't, but it's a strange question coming from Yglesias. After all, he is also paid to "add to the stock of human knowledge," and he too has written a book to "disseminate said knowledge". As far as I know, Yglesias does not give that book away for free in any form.

And yes, Yglesias disseminates knowledge for free on his blog, but so do Holbo and Waring. So why should academics be held to a higher standard than pundits?

Entrepreneurship in the OECD

A few days ago Krugman linked to this CEPR report (pdf) comparing the ratio of small-business employment to total employment in the OECD. It turns out that despite America's popular image as a nation of entrepreneurs, it has one of the smallest small-business sectors in the developed world (by this metric, at least). The CEPR report singles out one possible reason:

One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health care system in place in the United States may act as a significant deterrent to small start-up companies, an experience not shared by entrepreneurs in countries with universal access to health care.

That certainly is plausible, and even if it isn't the driving force it must be a contributing factor. Unsurprisingly, this is Krugman's preferred explanation. But it isn't the only possible reason. Another could be barriers to entry.

It is exceptionally easy to start a new company in the U.S., and much harder to do so in (many) other OECD countries. In Germany (say), the process of registering a new company and obtaining the proper licenses can take years. At first, this should mean that there should be more small businesses in the U.S. than in Germany. But because of the lower barriers to entry, U.S. small businesses face tougher competition and an inefficient small business will quickly go out of business. In Germany the already-established business is able to extract rents through the higher barriers to entry which discourage all but the most-dedicated new entrants. The variance in entry costs can leave the number of German small businesses relatively fixed at a high level, while the American small businesses market is more dynamic but leads to a lower overall equilibrium. In this story, the lowering of barriers to entry actually causes the number of small businesses to fall in equilibrium.

A thought experiment might be illustrative. Suppose a skilled American worker is facing two options: 1. Start a new business and face lots of competition; 2. Join a firm that is already established and has sufficient market share that it will not be replaced any time soon. Many workers would prefer the security of the second option.

I'm sort of shooting from the hip here, and I'm not sure that this story really reflects reality. In fact, I can think of several other plausible explanations, including more migration and concentrated diasporas in Europe which would lead to smaller businesses to cater to particular ethnic/religious/national segments of the community; a greater concentration of the European population in urban areas, which leads to the creation of a lot of small restaurants, corner stores, and bars in cities; different lifestyle preferences in Europe that encourage more leisure and less work, thus benefitting smaller businesses that cater to leisure; different corporate norms that encourage more merging and acquiring of small firms in America, so the successful American small businesses are quickly gobbled up by larger corporations, while the unsuccessful firms go out of existence.

And, of course, health care.

The International Political Economy of Beer

Fallows finds the puzzle in a series of posts motivated by the First Annual White House Beer Summit (this year's featured topic: race relations!), but does not proffer a theory. That's too bad, because there has got to be an interesting explanation for why most Asian (and many Latin American) beers are watery and non-hoppy, why Anglo beers are heavier (and often served warm), why German beers are made of unfiltered wheat, why Bud Light is the best-selling beer in a country that boasts of such an amazing array of inventive micro-breweries. What's the unifying theme here? What explains cross-national divergence? Is it about natural characteristics? Accidents of history? Simple resource scarcity and/or weather constraints (I've heard this convincingly explain patterns of wine production)?

Surely somebody has written a long-form article or book on this topic, but I don't know of it. Can readers help?

Now that I about it, this post should probably be titled "The Sociology of Beer".

That's One Way to Do It

U.S. Government Stages Fake Coup To Wipe Out National Debt

ht: Chris