Growth in Cities and Countries

From Chang-Tai Hsieh and Enrico Moretti:

A large micro literature has documented the local forces leading to growth and decline of cities. This paper measures the consequences of these local forces on aggregate output and welfare. We use a Rosen-Roback model of urban growth to show that a summary statistic for the aggregate effect of local growth (decline) is whether it shows up as an increase (decrease) in local employment or as an increase (decrease) in the nominal wage relative to other cities. Differences in the nominal wage across cities reflect differences in the marginal product of labor across cities which, ceteris paribus, lower aggregate output. We show that the dispersion of the average nominal wage across US cities increased from 1964 to 2009 and may be responsible for a 13% decline in aggregate output. Changes in amenities appear to account for only a small fraction of this output loss, with most of the loss likely caused by increased constraints to housing supply in highly productive cities. We conclude that welfare gains from spatial reallocation of the US labor force are likely to be substantial.

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What does the Future Hold for Our Economy?

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Optimal Wealth Taxation: Redistribution and Political Economy

Here are a few interesting links from Ivan Werning on capital taxation, Piketty, and political economy.

1. Optimal Wealth Taxation: Redistribution and Political Economy - slides from his plenary at SED 2014

2. A Reappraisal of Chamley-Judd Zero Capital Taxation Results

Judd (1985) and Chamley (1986) showed that capital should not be taxed in a steady state. I revisit these results and their interpretation. My analysis casts doubt on their applicability. For Judd’s setting, I find that the zero tax steady state is only approached in special cases and, when it is, at a very slow rate, after centuries of high capital taxa- tion. In Chamley’s setting, the zero tax result requires sufficient upfront expropriation of capital and large government wealth accumulation. In contrast to an example in Chamley, I show that taxes may remain positive forever if constrained by a sufficiently low upper bound. Finally, I show that both results are driven by an infinite elasticity in the present value response of savings with respect to an infinitely distant future changes in the interest rate.

3. Ivan Werning and Emmanuel Farhi: Bequest Taxation and r − g 

We consider the role of the gap between the return to capital, r, and the growth rate of the economy, g, in a political economy model of bequest taxation. Higher values of r − g lead to higher wealth inequality, resulting in higher and more progressive taxes on bequest.

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People and Machines A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940 Using Immigration Shocks

From Jeanne Lafortune, José Tessada, Ethan Lewis:

This paper empirically tests if the Second Industrial Revolution changed the way inputs were used in the manufacturing sector, as has been argued by historical research. To do this, we estimate the impact of immigration-induced changes in skill mix in local areas in the United States between 1860 and 1940 on input ratios within manufacturing industries in these areas. Combining this and our model, we find evidence that the production functions were strongly altered over the period under study: capital began our period as a q-substitute for high skill workers and a strong complement of low-skill workers. This changed around the turn of the twentieth century when capital became a complement of skilled workers and decreased its complementary with low-skilled workers. We find that within-industry changes in production technique were the dominant manner in which areas adapted to immigration driven skill shocks, and find little movement of industry mix. We nevertheless fail to find significant impact of changes in skill mix on wages.


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Credit Supply in the Great Recession

1. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data by Olivier Coibion, Marianna Kudlyak, Yuriy Gorodnichenko, John Mondragon

One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to “keep up” with higher- income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.

2. Credit-Induced Boom and Bust by Marco Di Maggio and Amir Kermani:

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties in 2003 and that in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation produced an 11% increase in annual lending. Our estimates show that to this lending increase is associated with a 12% rise in house prices and a 2% expansion of employment in the non-tradable sectors, followed by drops of similar magnitude in subsequent years. Finally, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. These effects are even stronger for subprime and inelastic regions.


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Linkages and Economic Development

From Dominick Bartelme and Yuriy Gorodnichenko:

Specialization is a powerful source of productivity gains but how production net- works at the industry level are related to aggregate productivity in the data is an open question. We construct a database of input-output tables covering a broad spectrum of countries and times, develop a theoretical framework to derive an econometric specification, and document a strong and robust relationship between the strength of industry linkages and aggregate productivity. The strength of the relationship is in line with the results we obtain in simulations of a calibrated multi-sector model. 


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A College Major Matters Even More in a Recession –

A College Major Matters Even More in a Recession –

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