The Wall Street Journal

interviewed Robert Putnam to see what he thought of Nico Voigtländer's, Shanker Satyanath's and my study on association density and the rise of the Nazi Party, where we show that towns and cities with more singing, hiking, and animal breeding clubs also had many more people joining the Hitler movement... apparently Putnam thought that social capital is still a good thing for democracy on average. You can read the small article here. 

If your parents are on welfare

your chances of ending up on welfare yourself are higher. So what? The link is only interesting if it is causal -- and unobservables can very well be expected to drive the correlation across generations. For example, people who struggle with education will probably have children who also don't do well in school; their chances of requiring hand-outs must be higher.

How to solve the problem? Norwegian data to the rescue! Dahl et al. in new NBER working paper use random assignment to judges in Norway - with some of them more likely to uphold/deny access to disability insurance -- to identify the nature of the link. The result - it's causal, it's big, and it's depressing:

Strong intergenerational correlations in various types of welfare use have fueled a long standing debate over whether welfare dependency in one generation causes welfare dependency in the next generation. Some claim a culture has developed in which welfare use reinforces itself through the family, because parents on welfare provide information about the program to their children, reduce the stigma of participation, or invest differentially in child development. Others argue the determinants of poverty or poor health are correlated across generations, so that children's welfare participation is associated with, but not caused by, parental welfare use. However, there is little empirical evidence to sort out these claims. In this paper, we investigate the existence and importance of family welfare cultures in the context of Norway's disability insurance (DI) system. To overcome the challenge of correlated unobservables across generations, we take advantage of random assignment of judges to DI applicants whose cases are initially denied. Some appeal judges are systematically more lenient, which leads to random variation in the probability a parent will be allowed DI. Using this exogenous variation, we find strong evidence that welfare use in one generation causes welfare use in the next generation: when a parent is allowed DI, their adult child's participation over the next five years increases by 6 percentage points. This effect grows over time, rising to 12 percentage points after ten years. Using our estimates, we simulate the total reduction in DI participation from a policy which makes the screening process more stringent; the intergenerational link amplifies the direct effect on parents at the margin of program entry, leading to long-run participation rates and program costs which are substantially lower than would otherwise be expected. The detailed nature of our data allows us to explore the mechanisms behind the causal intergenerational relationship; we find suggestive evidence against stigma and parental investments and in favor of children learning from a parent's experience with the DI program.

Some Spanish lessons

Summer is upon us; Barcelona is swarming with tourists. Doubtlessly, many are here to brush up their Spanish a bit, too. Mauricio Drelichman and I have been writing about some other Spanish lessons - those from Habsburg Spain for modern-day debt markets. The Financial Times carries a brief op-ed piece of ours in tomorrow's edition, explaining the importance of state-contingent debts for avoiding pro-cyclical fiscal policy.... it is remarkable that risk sharing in sovereign debt markets worked much better in the 16th century than it does today!

Laffer curve reflections (Detroit and Spain edition)

Tyler Cowan has some interesting observations on tax rates in (now bankrupt) Detroit - high rates, low revenue. Who would want to live there, given how easily you can move away by a few miles?

Problems for states are different - moving away is costly, though high-skilled people certainly can and do move to greener pastures when times get too awful. There is also another effect that comes from jacking up tax rates, which produces something like the Laffer-curve effect, but for different rates. Spain/Catalunya (some of the income tax here is regional) how has the 3rd highest income tax rates in the world, after Aruba and Sweden (and believe me, public services are not like in Sweden). Strikingly, actual tax revenue relative to GDP is one of the lowest in the OECD -- a full 9% less than the Netherlands, 7% less than Germany, and about on par with Switzerland, where tax rates on the same income are on average half.

This is another way of saying that taxation in Spain (and much of Latin Europe) is hugely distortionary - you have a small part of the economy that can be taxed, and the state squeezes out the last drop; and then there are vast parts where there is hardly an attempt to tax at all. Notary records of property values? much less than what people paid, no problem? No receipt for your purchase in the pharmacy? No problem. Italy introduced an obligation to carry the receipt within a certain distance of every shop to stop tax fraud... not here. The list goes on; all those cars with Andorra licence plates in Barcelona - do these guys really live there? I doubt it. And so, as rates have gone up, the incentive for people to switch from the (legal, efficient) part of the economy to the (untaxed, inefficient) part has gone up hugely. And guess what, it doesn't help with aggregate productivity.

More reasons to worry (Kenen-Mundell edition)

about the Euro, in case you needed them. If countries suffering negative shocks see their young leaving for greener pastures, there is nobody left to pay the debts. Frances Coppola has some good info on this; Paul Krugman spells out the implications for optimum currency area theory. You could add a related wrinkle -- as a country's finances suffer, and tax rates go up, the mobile part of the labor force calls it quits. From anecdotal evidence, there has been a huge outflow from the expat community in Spain, and near-confiscatory taxation (as well as lousy demand conditions) has a lot to do with it. Which is another way of saying that fiscal integration may be the only answer (other than a LOT of trade). 

Barcelona is No. 1 in the World!

in at least one dimension ... not sure what this is based on it, but there is no doubt that there is a real problem here. Just the other day I sat on a plane where the person right and left of me had been robbed, and then got to discuss with the row behind the when where and how because they, too, had lost wallets, passport, luggage, cameras, etc. etc. And if you are wondering if it is a question of will or ability - there is absolutely no problem for the authorities to issue a parking fine within 30 seconds of the infraction having occurred; if they could make money from catching pickpockets, the problem would disappear in matter of months.

Frankfurt gets it...

perhaps some financial history is not a bad thing. Two banks (Metzler and de Rothschild) have endowed a (visiting) professorship in financial history in Frankfurt. It's a timely move...