American Economic Review

The latest issue of AER arrived. This issue is the Papers and Proceedings of the 199th Annual Meeting of the American Economic Association. Some of the papers reminded me of the fact-free model-building that is critically scrutinized here. But there were a few things that caught my eye.

1. Karen E. Dynan and Enrichette Ravina, "Increasing Income Inequality, External Habits, and Self-Reported Happiness," pp. 226-231.

This article is about how economic inequality affects people's happiness. The authors begin by noting the commonplace observation that your happiness doesn't necessarily depend just on your own income, but on how you compare to your neighbors/friends/peers. The interesting thing here, however, is that the authors find "some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income. It would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution." (p. 226). Later, the authors say that "relative concerns primarily affect people who have an above-average income but are not extremely rich." (p. 229).

Wow. So maybe the reason that professors and pundits talk about this effect of inequality in the first place is because they belong to precisely that class of people (above-average income, but not rich) who are most likely to feel jealous of their peers' income.

2. Alessandro Gavazza and Allessandro Lizzeri, "The Perils of Transparency in Bureaucracies," pp. 300-305.

The authors' main point here (and it's purely theoretical) is that transparency -- more information about how a government institution performs -- isn't always more efficient. For example, if everyone knows that a particular DMV office is more efficient, lots more people will want to go there. But bureaucrats in such offices aren't rewarded monetarily for having the most customers; they're rewarded in ease and time if they can manage to work less. Thus, more transparency might end up giving them an incentive to slack off (because they don't want to be flooded with more customers).

At least that's how I understand this paper, which has some math that I don't quite follow.

3. Raghuram Rajan and Arvind Subramanian, "Does Aid Affect Governance?," pp. 322-327.

The authors' main finding here is that "the more aid a country has received, the smaller its share of manufacturing. . . . . A 1 percentage point increase in the ratio of aid to GDP is associated with a reduced share of manufacturing in total GDP of about 0.2 to 0.3 percentage points." (p. 322). They speculate that the cause is that manufacturing -- unlike agriculture or mining -- requires "many more transactions between unrelated parties," which will happen more smoothly in a country where there is an uncorrupt judiciary, the rule of law, contract enforcement, etc. But foreign aid might reduce a government's "need to govern well." (p. 322). OK, that's a bit speculative.

The conclusion is interesting: "An important step for both aid givers and aid recipients is to recognize that aid inflows are not an unmitigated blessing, and that the worst thing that can happen with a greater quantity of aid is not only that it will be wasted. More aid, if ineffectively used, can actually set back a country in its path to development."

4. William Easterly, "Was Development Assistance a Mistake?", pp. 328-332.

As far as I could tell, out of perhaps 75 articles in the journal, this was the most readable. After reviewing the evidence that foreign aid hasn't worked, Easterly hits his stride:

Despite the frequency of statements like "we must end world poverty," it is seldom clarified who this "we is that is taking responsibility for world poverty. Is it the World Bank of United Nations officials? Is it national government leaders? Is it celebrities? Perhaps "development experts" are the most likely candidates.
* * *
The other possibility, that development experts are greatly overrated as a means to achieve develoopment, goes against the self-interest of everyone in this profession (including this author). Yet it is true, after all, that development experts played no role in the development of the developed countries. . . .
* * *
In sum, we don't know what actions achieve development, our advice and aid do not make those actions happen even if we knew what they were, and we are not even sure who this "we" is that is supposed to achieve develoopment. I take away from this that development assistance was a mistake.

But Easterly doesn't end on a total downer:

Yet it doesn't necessarily follow that foreign aid should be eliminated. Once freed from the delusion that it can accomplish development, foreign aid could finance piecemeal steps aimed at accomplishing particular tasks . . . -- to reduce malaria deaths, to provide more clean water, to build and maintain roads, to provide scholarships for talented but poor students, and so on.

5. A pair of papers finds effects from immigration:

Deborah Reed and Sheldon Danziger, "The Effects of Recent Immigration on Racial/Ethnic Labor Market Differentials," pp. 373-377.

They find "negative effects of recent immigration on the employment, and especially the wages, of low-skilled workers." (p. 373). For whites without high school diplomas, recent immigration is responsible for "almost one-third of their observed employment decline during the 1990s." For blacks without a diploma, it's a sixth. As for wages, "in the absence of recent immigration, wages would be about 3.5 . . . percentage points higher for blacks, almost 3 points higher for whites, and more than 5 points higher for Latinos." (pp. 375-76).

Paul Ong and Don Mar, "Differential Impacts of Immigrants on Native Black and White Workers," pp. 383-387.

The effects here are quite different. These authors claim that "recent Asian and Latino immigrants have a positive effect on native NH [non-Hispanic] whites and blacks, but as they undergo economic assimilation the impact becomes negative. This is consistent with the hypothesis that recent immigrants tend to be incorporated into sectors with jobs that are highly undesirable for native workers, and by making these sectors more viable, they have a net complementary effect on native born workers. As Asian and Latino immigrants adjust to the US labor market, however, they more likely become competitors with some native workers." (p. 386). Interestingly, the downward impact of non-recent Asian immigrants on both white and black income seems to be about three times stronger than the effect of Hispanic immigrants.

6. Neuroeconomics.

In one article on neuroeconomics, the authors mention that part of their experiment scans people's brains in an fMRI machine while they are presented with choices about whether to receive a certain amount of money now vs. more money later. Interesting, but if people are actually being put in one of these, I find it hard to imagine anything more likely to produce a sort of Hawthorne effect or observer effect.

I've had an MRI, and while I'm not particularly claustrophobic -- the one time when I nearly got stuck in a cave, I found it rather invigorating -- the MRI machine was still very confining and a bit unnerving. You're sandwiched in this narrow metal tube, tight enough that you can't even move your arms, and there are lots of strange and loud noises as the machine takes various scans. Maybe -- just maybe -- this is going to have a large effect on what goes on inside people's brains.

I don't know how neuroeconomists deal with this. It seems to me that if you want to know how people make economic (or any other kind of) decisions, you'd need some method of scanning people's brains at high resonance -- without their knowledge, as they go about everyday life. Good luck with that.