Indian Reservations

I never thought I would be able to mix boyhood entertainment with serious scholarship... cowboys and Indians AND serious economics? Get lost. But no, one of the job market candidates coming through CREI/UPF, Christian Dippel from U Toronto, has a very clean and cool paper on the incomes of native American-Indians. First, he shows that income differences between different reservations are HUGE -- much bigger than across US states. Most of these probably opened up in the last 20 years, or so he argues. This matters, because until ~1980, the reservations were largely run by the federal government. Under Reagan's "New Federalism", they got a degree of autonomy. Christian shows that reservations where previously politically independent groups were forced together do much worse than the rest -- the effect is around -20 to -30%. He uses a clever identification strategy that uses the effect of mining on reservation formation in the 19th century, which is reasonably plausible. This allows him to claim the effect is causal. Overall, I thought this was very nice work - clear, clean, important.

The only thing that remained a bit muddy is the mechanism. What political economy model would rationalize this gigantic effects? If you force previously independent clans together, why is that necessarily bad? It could be that there is more competition for leading the local council, instead of having deep political factions that lead to stalemate or power-grabbing. Ex ante, I wouldn't be sure what to expect, so the actual, big differences leave me a bit puzzled. But Christian has some plans to get census data to tell us more about exactly which type of activity suffers on the 'bad' reservations. With that in hand, my guess is that the paper could go far. Actually, in some ways, Christian reminds me a lot of another Toronto product, Nathan Nunn, who first got a job as an assistant professor at UBC-Vancouver before going here.

Too much...

...going on these days. Last week, we had Mike Woodford (Columbia), who talked about how we can make sense of what the Fed (and many other central banks) were doing by tweaking their balance sheets and buying financial sector assets. It's actually surprisingly hard to break the equivalent of the "nothing matters" equivalent of Modigliani-Miller theorem. Mike gets there by a combination of the banking system doing funny things (sometimes worrying too much or too little about credit risk), and massive heterogeneity amongst agents. It all adds up in a Neo-Keynesian model... and amazingly, it was all done without anyone having worked it out beforehand. What was the old Keynes comment about policymakers being beholden by a defunct economist? Here, it worked the other way around, with practitioners going first, and theory following.

This weekend, we had a CREI-CEPR conference on the Political Economy of Economic Development. Held in the beautiful monastery in Manresa, there was an embarrassment of intellectural riches, with Tim Besley speaking on the emergence of state capacity, Jim Robinson presenting joint work with Daron Acemoglu about the monopoly of violence in Venezuela, and a whole host of other interesting papers (from local elite capture in China to war and genetic relatedness).

At the same time, we had news about the biggest bailout in history being finalized. After a mini-bounce this morning, Greek bonds have started to trade lower... it seems that the last few weeks of flip-flopping have unnerved investors a great deal. I wrote some months back that the game was entirely political - that the economics were hopeless, and that only a political decision to make Greece whole could stave off default. It seems that markets came around to that view, and now find it hard to believe that the political solution is at hand. As exercises in "shock and awe" go, this one is as yet not very successful...