The resource curse... and coffee

Some papers take quite a bit of time to come out... and sometimes, I have half-forgotten what they are about when I get the print edition. Mauricio Drelichman and I have a speculative piece where we wonder if American silver made life too easy for Philip II of Spain. In effect we argue that he never had to strike the grand constitutional bargain a la the Glorious Revolution because he had silver revenue instead. We did the piece quite some time ago (now published in Helpman, Elhanan; ed. Institutions and Economic Performance, Cambridge, Ma: Harvard University Press. It was nice to see that the folks over at the Economic History Blog picked it up. Mauricio and I always felt we should have done more with the idea... but as they say, so many papers, so little time.

My co-author Jonathan Hersh just left town. He is off to Wharton for his Ph.D. this fall, and we managed to get our wp on the value of coffee, tea, and sugar into shape before he left. There is a slightly longer version on VOX-EU, and here is the abstract:

Did living standards stagnate before the Industrial Revolution? Traditional real-wage indices typically show broadly constant living standards before 1800. In this paper, we show that living standards rose substantially, but surreptitiously because of the growing availability of new goods. Colonial luxuries such as tea, coffee, and sugar transformed European diets after the discovery of America and the rounding of the Cape of Good Hope. These goods became household items in many countries by the end of the 18th century. We use the Greenwood-Kopecky (2009) method to calculate welfare gains based on data about price changes and the rate of adoption of new colonial goods. Our results suggest that by 1850, the average Englishman would have been willing to forego 15% or more of his income in order to maintain access to sugar and tea alone. These findings are robust to a wide range of alternative assumptions, data series, and valuation methods.

So, there you have it - your morning cup of coffee or tea should be worth 15%+ to you (or it was to Englishmen in the 19th century).

Graduating the ITFD Class of 2009

Last Friday was a special day for our Master Program - we graduated the first class of students. In Gaudi's breathtaking and slightly vertigo-inducing Pedrera on the Passeig de Gracia, the BGSE arranged for the graduation ceremony of all the M.Sc. taught in the school (thanks to Caixa Catalunya, which owns the building and is one of the BGSE sponsors). It was a moving occasion. I particularly the speech by one graduating student, who said that she was sure to forget how to log-linearize the budget constraint, but she was never going to forget the friends she made. Thinking back to my own student days, taking an M.Sc. in Oxford in the early 90s, I would say that I learned almost as much from my fellow students as from my professors - which is not to say that the latter had little to offer. It's just that you learn to much from the informal exchange with those who try to accomplish the same, suffer through the same exams and try to get to the bottom of the same problem sets.
After the ceremony, the school put on - nice touch, I thought - a reception with the best of local cava and nibbles. I particularly enjoyed meeting the families of the students I had taught for a year. I hope that they will treasure the memories of their year in Barcelona for a long time. Here you can see me celebrating with three of our students, from left to right: Zusana Hajducikova (Slovenia), Vera Bakman (US-Russia), and Simin Yousefi (Iran). Who said that being the director of a Master's program didn't have its compensations?

Operation E

These days, you see big billboards all over Spain, announcing that Plan E is at work here. Plan E is the plan to Estimulate Employment in Espanya, initiated by the social-democratic party under PM Zapatero. The plan is an example of classic recession-fighting - big public work programs. Keynes' idea of paying people to dig holes at a time when a liquidity trap constrains the power of monetary policy I can understand. I don't necessarily agree with it as the best policy responses, but hey, these are dire days, and politicians should try many things, provided they have a chance of making a bad situation better. The way the digging of holes happens at the moment in Spain doesn't qualify, if you ask me. I live on the Passeig de Sant Joan, a beautiful tree-lined street in the city center, with green lawns, playgrounds, and a large pavement for pedestrians ambling, cyclists zipping pasts, and parents pushing their kids around in a stroller. For the last week, what was a perfectly good pavement has been removed by small bulldozers and men with jackhammers. I swear, the surface could have handled another 20 years of continuous use without showing any signs of deterioration, and I am picky with these things (and think that the average American pock-marked road is not really acceptable in an OECD country).
And it's not just that the Keynesian holes are being dug in my backyard - a week ago in Madrid, I could see how Calle Serrano currently looks. The sidewalks, also in perfect condition, have disappeared. Walking there is so tough, I wonder how any shops survive. These are small things, and I would still smile at them if they got us out of the current economic mess. I have already referred to the arguments about the efficacy of stimulus for these things in an earlier post. The striking thing is that a) there is an awful lot of building that would really benefit Spain and its inhabitants, and it remains undone b) rescuing construction just slows an adjustment that is inevitable c) I can understand why you want to spend and borrow in a recession. I think there is no economist worth his salt that thinks that spending more and taxing more at the same time is going to revive the economy and expand demand (enough). Let's take these in turn. Spain, in large part, runs on tourism. And for a country of great natural beauty, it's striking how much of it is disfigured by the ugly scars of urban expansion gone wrong, and the insensitivity of how powerlines and telephone cables invariably dangle in the middle of the most precious views. Spaniards, when I point this out, often exclaim "oh, I don't see them any more". I could name 20 places in areas with lots breathtaking nature in the Pyrenees, the Costa Brava, or in Mallorca, where high-powered tension lines compete with each for adding an industrial touch.
The coasts are worse. Where they are not completely ruined by Benidorm-like developments, the lower-density housing estates have telegraph poles at every which angle protruding from the ground, with a spaghetti-style set of telephone lines and electricity lines radiating out to houses or connecting to the next big line, disfiguring the view of the sea or the mountains, or both. For people from the rest of Europe, where almost all the tourists and potential house-buyers come from, these are strange eye-sores; you don't see the same thing in, say, Positano, in Tuscany, or on Sylt. These are, not to mince workds, things you expect to see in Latin America, but not in a rich Western country. Burying all this ugliness would be great for tourism and for stimulating buying interest for all those homes on the costas. Instead, at the height of summer, in the most touristic parts of Spain's two principal metropoles, we have construction the sum benefit of which will be less than zero.
My final question is if there is any structured reasoning behind the new tax and stimulate approach. Raising taxes to reign in the frightening deficits at the height of a recession is what the German government under Brüning did in the early 1930s. It didn't do the economy or the country much good. If you maxed out the national credit card, I suggest that raising taxes is the last thing you want in order to keep spending. Perhaps we don't need to repave the Passeig de Gracia non-stop? True, the people paying the new taxes (Ireland raised them already; Spain is almost certain to follow in the fall) will have a lower consumption share in income than the people you employ through public works. But tax distortions are already high, and some of the people you tax are pretty footloose (I doubt that many people other than well-paid employees at large companies and in the government will be caught by the rise in Spanish taxes, as so many of the high earners in the private sector dodge taxes very successfully). So apart from driving some specialists abroad, the net effect is likely to be small -- I certainly don't expect the deficit to be reduced much in this way.

Balance sheets vs animal spirits (semi-wonkish)

I had an interesting mini-exchange of ideas with Menzie Chinn the other day (he is one of the two minds behind econbrowser, and a terrific international economist). How would you tell if a decline in consumption is driven by animal spirits as opposed to balance sheet effects? In the first case, everyone panics because of uncertainty about what the future will hold. If enough people stop buying cars, the car manufacturers go out of business. Fear turns into real damage in the economy. In the second case, people wake up one day and realize they are poorer than they thought they were. The debts may be bigger, or the assets less valuable. They start to save, and consumption falls. As volume of good bought declines, so does output, and you get a good-sized recession. Telling the two apart will be next to impossible, since animal spirits have every reason to head south when balance sheets look ugly - or so we reasoned over at the lunch buffet of the International Seminar on Macro, organized by the NBER in Cyprus (Menzie has a write-up of papers here). It struck me that you could actually tell two apart, sometimes. Imagine that consumers start to feel pretty good -- they tell the guys doing the surveys that things are looking up, they worry less about the future, everything just might be fine. So animal spirits are in ok shape, given the circumstances. But they still refuse to spend much. That, I think, is a pretty good description of what the last 3 months have looked like in the US. Consumer sentiment isn't stellar, but it's come back up a long way. Thanks to the stimulus, incomes are up, too. The only thing missing? People are not spending. Ever since houses stopped acting as ATMs, they don't feel very rich, and until the damage in those retirement accounts is repaired and the negative equity in the house taken care of, they may not return to their happy-go-lucky ways. That, of course, would be seriously bad news, as the stimulus would end up being saved. Then you have a circular movement, where the new debt issued by the government goes to the population which then saves it, in the form of T-bonds. Another reason to be sceptical about the expected multipliers... (for a more serious discussion of this, have a look at the writings of Robert Barro and Paul Krugman on how large the multiplier is).