Right in the Short Run

For all the crap Steve Levitt gets about his abortion paper due to coding errors and what not, I feel bad for him on this count.  Kiki Pop-Eleches did similar work in Romania, utilizing a “natural experiment” in which the Romanian dictator Nicolae Ceausescu banned abortion in 1966.  In any event, he finds that:

The restrictive policy disproportionately affected disadvantaged women and created telltale signs of the “unwantedness” effect - a rise in infant mortality and criminal behavior later in life.

The paper can be found here.  Essentially, Kiki found similar results.  People seem to forget this when smashing Levitt. Sure, a few coding mistakes were made, and that certainly isn’t a good thing.  But that certainly does not take away from the ingenuity of his original paper, which seems to be corroborated by other independent studies such as Kiki’s.

Yes, says Alex Tabarrok:

Here’s one idea which has got me thinking. In the debate over the economics of global warming the correct discount rate to apply to future generations is a key variable with those arguing that we should do something now, implicitly (and explicitly) arguing for a low discount rate. But if we count future generations highly we ought also to be in favor of reforming social security. Investing social security in the stock market “royally screws” current retirees but increasings the savings rate which will be benefit future generations. Thus, a low discount rate ought to weigh in favor of doing something about global warming and investing social security funds in the stock market. Not many people come out consistent on these grounds (I think Brad DeLong is one of the few.) I know, I don’t but Landsburg has got me thinking.

This is an interesting way to look at things. Some responses:

1. We should choose the reform that, on the margin, provides the most intergenerational benefit. Where global warming falls in this regard, I do not know, but Social Security is clearly swamped by Medicare in its long run shortfall.
2. Social Security reform only benefits current and future Americans, while fighting global warming benefits everyone.
3. There is, as Martin Weitzman calls it, a “left tail that carries most of the weight of expected marginal utility” to global warming outcomes in the absence of reform. We don’t know just how bad a world without global warming reforms will be in a century, but it could be very bad indeed. The distribution of marginal utility from an unreformed Social Security system is very tight and not particularly negative.
4. As for shirking on promises made to current Social Security recipients by investing cash that was destined for them into the stock market, then paying it out to future generations: doing so would royally screw anyone who was counting on Social Security for retirement. Future generations would not forget this sudden change, and would have to discount their SS payments by the likelihood of being screwed out of them — if it happened once it can happen again! This dynamic effect could swamp the benefit of screwing the current generation.

I believe reason 3 is why Tabarrok thinks Brad Delong is consistent. Check out Delong’s post, in which he reviews Martin Weitzman’s article.

A must read paper by Banerjee and Duflo: The Economic Lives of the Poor. Abstract below:

This paper uses survey data from 13 countries to document the economic lives of the poor (those living on less than $2 dollar per day per capita at purchasing power parity ) or the extremely poor (those living on less than $1 dollar per day). We describe their patterns of consumption and income generation as well as their access to markets and publicly provided infrastructure. The paper concludes with a discussion of some apparent anomalous choices.

The passages on Why don’t the poor eat more? and Why don’t the poor save more? are especially interesting.

Dean Baker has something to say about Thailand’s decision to invalidate patents on certain AIDS and cancer drugs:

Newsweek has an article this week about Thailand’s decision to issue compulsory licenses for a number of important drugs. By eliminating patent monopolies on several AIDS drugs, as well as a few other medications, Thailand was able to reduce prices by close to two-thirds.

Naturally, the drug industry is furious over the possibility that their patent monopolies may not be protected. Newsweek apparently shares the drug industry’s anger, telling readers that “advocates of free trade see Thailand’s move as a big threat.”

Actually, any real advocate of free trade, almost by definition, would have to applaud Thailand’s action. After all, the Thai government is eliminating a government imposed monopoly and allowing drugs to sell at prices that are much closer to their free market level.

Dean is right that free trade and patents have nothing to do with each other. If anything, patents inhibit free trade by restricting the legal flow of generics. But so what? Advocates of free trade rarely advocate that everything should be traded freely. By Dean’s logic, free traders are hypocritical if they think hard drugs should be illegal. And that would make for a lot of hypocrites.

As for the utility of invalidating patents, there are problems with this method of making treatment cheaper. Holding the selection of drugs fixed, invalidating a drug’s patent enables a nation to produce the drug cheaply and treat its citizens better. But what about over time, when the potential profitability of drugs drives research decisions, and ultimately the selection of drugs available to treat diseases?

The expected profits of research come mainly from the developed world, where countries are rich enough to pay the high prices that pharma charges for its medications. Developing countries are usually too poor to pay very much, and even if they might be able to pay, they may invalidate patents to avoid pharma’s markups. (To pharma, the possibility that countries refuse to honor patents simply reduces expected profitability.)

I’m sure Dean would agree that some relatively inexpensive research could provide enormous benefits for the developing world. For example, research might find AIDS drugs that were better suited to environments with few doctors, or medication that did a better job of protecting children against malaria. But these drugs would have no market in the developed world. Pharma sees no profitability coming from developing world specific treatments, and so pharma doesn’t bother spending money on research that would alleviate developing world problems.

Dean would probably respond that the government should be doing this research. Actually, I agree with Dean that having the government doing R&D could be an avenue of getting cheap new drugs for the poor. But invalidating patents doesn’t help the government do research, and it hurts the long run usefulness of the private sector in producing life-saving medication.

(PGL at AngryBear has some commentary as well.)

Once upon a time, Abhijit Banerjee (MIT), Angust Deaton (Princeton), Nora Lustig (UNDP), and Ken Rogoff (Harvard), together with a number of my favorite economists including Daron Acemoglu (MIT), Marianne Bertrand (Chicago), Peter Diamond (MIT), Esther Duflo (MIT), Michael Kremer (Harvard), and Chris Udry (Yale) got together and had a party!

What did they do at this party? Being nerdy genius academic types, they wrote a paper. Specifically, they evaluated World Bank research from 1998 to 2005. Here is an excerpt:

Bank researchers have also done extremely visible work on globalization, on aid effectiveness, and on growth and poverty In many ways they have been the leaders on these issues. But the panel had substantial criticisms of the way that this research was used to proselytize on behalf of Bank policy, often without taking a balanced view of the evidence, and without expressing appropriate skepticism. Internal research that was favorable to Bank positions was given great prominence, and unfavorable research ignored. There were similar criticisms of the Bank’s work on pensions, which produced a great deal that was useful, but where balance was lost in favor of advocacy. In these cases, we believe that there was a serious failure of the checks and balances that should separate advocacy and research.

While that passage is certainly not indicative of the overall findings of the committee, it is the juiciest. Perez Hilton would be proud.

In the first of a two-part post, we look at the reflections of NYU economist Debraj Ray about new developments in development economics, in this old paper from 2000. In the second part we will look at Abhijit Banerjee’s reflections on where development economics is headed as of 2007.

In recent years, the subject has made excellent use of economic theory, econometric methods, sociology, anthropology, political science and demography and has burgeoned into one of the liveliest areas of research in all the social sciences. And about time too: the study of economic development is probably the most challenging in all of economics, and provided we are patient about getting to “the bottom line” and the “policy implications”, it can have enormous payoffs.

The main trend I would like to try and document is a move — welcome, in my opinion — away from a traditional preoccupation with the notion of convergence. This is the basic notion that given certain parameters, say savings or fertility rates, economies inevitably move towards some steady state. If these parameters are the same across economies, then in the long run all economies converge to one another.

Ray then goes on to offer a number of theories that refute the conditional convergence hypothesis. These theories argue that “societies that are fundamentally similar in all respects might behave differently, and persistently so”.

Ray offers two reasons for his criticism of convergence theory. First, he contends that economies can exhibit multiple equilibria. “Simultaneously, such societies may display low savings rates or “cultures of corruption”, but this latter set of features cannot be related causally to the former.”

Second, Ray maintains that historical configurations may be important to development trajectories. In particular, two countries can face almost identical values of parameters relevant in growth models and yet proceed down strikingly distinct trajectories due to their differing initial conditions.

Of course what ultimately matters are the policy recommendations stemming from a theory of development. Ray’s theories promote one-time intervention policies that push the country into a new (and more desirable) equilibrium, while the old-guard convergence theories would require permanent shifts in relevant parameters.