Why corruption will always be with us

How would one define corruption. In economic terms, one definition could that two parties engage in a mutually beneficial transaction to the detriment of an other and society in general, and this despite rules put in place to prevent this. I am not sure everyone will agree with this definition, as it includes everyday situations that one may not generally associate with corruption, such as small gifts we offer to superiors or teachers.

Ulrike Malmendier and Klaus Schmidt study, without calling it corruption, such behavior in an experimental setting. They find that subjects of a gift do reciprocate even if they have no incentive to do so. Worse, they reciprocate more if it is at the expense of a third party, and everybody knows that the third party is affected. Finally, participants correctly assess how their behavior was influenced by gifts, but believe others are much more influenced. It is difficult to square any standard theory with these results. It also implies that such gift-giving is going to be difficult to stamp out, at least when it is relatively small such as in these experiments.

Interpreting the Fed

My friend and sometime coauthor Larry Ball sends me his quick analysis of the Federal Reserve's recent announcement:

I think the FOMC announcement is big news: for the first time, the Fed clearly says it will be more dovish in the future than the pre-crisis Taylor Rule (TR) dicates.

In my estimation, the pre-crisis TR is something like the following for the real interest rate r:

r = 2.0 - (1.5)(u-u*) + (0.5)(pi-2.0).

Let’s say u* is still 5.0. Then if u=6.5 and pi=2.5, the TR says r = 0, which implies the nominal interest rate is i = 2.5. Yet the Fed says that i will still be zero!

Some argue that u* has risen above 5.0. That would raise the i implied by the TR, strengthening the conclusion that the Fed’s new rule is more dovish than the TR.

Some argue that r* [the constant term in the TR] has fallen from 2.0 to 1.0. I doubt it, but even with that change, the TR still implies i = 1.5. My conclusion about dovishness is robust.

This deviation from the TR has not happened since the TR was discovered. In particular, the Fed was NOT more dovish than the TR in 2003. I believe the numbers for 2003 are roughly u=6.0, u*=5.0, and pi=1.0. For the TR shown above, the 2003 numbers imply r =0 and i=1.0, which is about the same as the actual i.

It is not clear whether the Fed’s announcement of future dovishness will have significant effects today. The efficacy of announcements about future monetary policy is unproven.

Japan's lost demographic decades

Since the asset bubble burst in Japan in 1990, the economy has stagnated despite significant policy efforts. Interest rates have been very low all along and fiscal policy has certainly not been austere. What was once labeled a lost decade has now become a pair of lost decades. Can only the burst bubble and the issues with the Japanese financial system be blamed?

Reiko Aoki thinks the demographic change in Japan has a large role in this extended stagnation. As is well know, Japan is aging considerably, and this has of course a dramatic impact of the savings picture. Financial institutions that were built to accommodate rapid growth and a young population looking to safeguard massive amounts of savings struggle to deal a much older population that is in the phase of eating its savings. Worse, as institutions need to adapt to the new situation, reform is hindered by the large voting block of the elderly whose interest lies in the short-term provision of their pensions.

Quite obviously, the current imbalance in the demographic pyramid is the problem. Aoki thinks that fertility must be encouraged. This has worked little in other economies, but may be much easier to implement politically than the best solution, get people to retire later. Immigration is another solution, but as other countries are looking to embrace similar solutions, we may run out of willing young migrants. And Japan is not the obvious choice for a migrant, given the high entry cost in terms of integration.

Option C

In the negotiations over the fiscal cliff, many people think the House Republicans are in a tough spot.  The logic is that they have little leverage, because they face only two choices:

A. Concede to most of the president's demands.
B. Take the economy over the cliff, and get blamed for it.

As a result, the logic goes, they will end up doing A, because B is so much worse.

Keith Hennessey points out that there is also option C: Extend the tax cuts, except at the top, for one year. Apparently (and I was not aware of this), Senate Democrats passed a bill doing exactly this back in July.  If the House passes it now, it goes to the President's desk, and he would have a hard time vetoing it.

This is not great policy, as it sets up another fiscal cliff one year from now, and it does not address all the spending cuts that are part of the fiscal cliff.  But from the Republicans' point of view, it may be better than either A or B.  Keith argues that the ability of Speaker Boehner to fall back on this option should give him more bargaining power as he negotiates with the president.  That is, because the president won't like option C either, the possibility that it could occur may make him more willing to compromise.  From the president's perspective, it is better to make concessions today than having to do this whole fiscal-cliff thing again a year from now.

The Poverty Trap in France

From Forbes:

Let’s take an unemployed mother living alone with two children between six and 10 years old. In 2010, there were 284,445 French families in this situation that were on welfare.

This mother will be given the “Active Solidarity Income.” Since she has two children, the amount will be $1,100. If she is renting an apartment with a $650 rent, she will be given the “Housing Customized Aid,” amounting to $620. Then she will receive “Family Allowances,” which amounts to another $160. Finally, let’s add the payment known as “Allowance for the start of the school year,” which is $750 once a year, or $62.50 per month. (She might even benefit from other aids, but these are the most common.) She will be given a total of $1,942.50 per month.

Now imagine that this mother has found work and will be paid the “legal minimum wage,” which amounts to $1,820 gross—or $1,430 after taxes. Since she would be earning $1,430, she will no longer receive the “Active Solidarity income.” Her “Housing Customized Aid” will be lowered to $460, but she will still be given “Family Allowances” and the “Allowance for the start of the school year.” Therefore, her total income will amount to $2,112.50....

For this mother of two, working again will bring her family an additional income of only $170. Moreover, this $170 is likely to be lost in the cost of transportation to work, since the cost of gas in France is $7 per gallon. In any case, such a small amount of money is not an incentive to go back to work. Between staying home and working, the choice is simple: welfare is a better deal.

Are immigrant nurses better than domestic ones in the US?

All industrialized economies suffer from a chronic shortage of nurses. Demand for health care is very high, yet nurses are relatively poorly compensated for grueling schedules, important responsibilities and thankless work. It is thus not surprising that the domestic supply of nurses is limited despite major efforts in broadening nursing school opportunities. One has to rely on immigration to fulfill the needs, with potentially the risk of attracting lower quality nurses, as they come from countries with lower human capital and different cultures or traditions.

Patricia Cortés and Jessica Pan study the quality of immigrant nurses and compare them to US native ones using wages and a measure for quality. The half of the nurses migrating to the United States in the last two decades come from the Philippines. They tend to take on harder tasks and tougher schedules (i.e., hospital work), yet they get higher wages than natives even after controlling for education, demographics, location and job characteristics. Non-filipino immigrant nurses fare, however, worse than natives. So is it that Filipinos are that much better? What is certain is that getting educated as a nurse is now done in the Philippines with the explicit goal of emigrating. As green cards for Filipinos are otherwise impossible to obtain (the waiting list is about 40 years long), getting employment sponsorship is essential. I suspect people who would be well qualified for other jobs choose nursing because of the inside track they get for emigration to the US, call that a network effect similar to when entire villages from Italy, Spain or Mexico migrating North for the same occupations, following a few pioneers.

Make Your Own Deficit-Reduction Plan

The Wall Street Journal's interactive graphic lets you choose from a menu of options.