You can watch

the testimonials accumulate for Mauricio's and my book over at the  facebook page for Lending to the Borrower of Hell (coming in early 2013 to a bookseller near you).

Inet interview

on the Spanish crisis. Keep in mind that this was taped in April of this year...

The first experimental paper in economic history

... hits the working paper stage. I meant to do this for... ? maybe a decade? Anyway, I finally found the right co-authors, time, and money to do it. I always loved the elegance of experimental economics; no problem with internal validity here. What do we learn? A lot, in general, but external validity can be an issue... So why and how to apply this to history? The idea is simple, actually - instead of using market conditions in the lab that are at best loose metaphors for financial markets, we use concrete, detailed features of a historical asset market where things really went wrong: the market for South Sea shares in 1720. We then switch of these features one by one, in a bid to pin down what was really responsible for the "mother of all bubbles". The paper is over at SSRN and the abstract is

Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debt-equity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.

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.