I'm an Economics Ph.D. student at UC Berkeley focusing on public finance topics at the intersection of labor economics and macroeconomics. My current research focus is on the interaction of corporate taxation, firm location decisions, and the location and scale of economic activity. You can follow me on twitter @omzidar.
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- From Natural Variation to Optimal Policy? The Importance of Endogenous Peer Group Formation
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From Yuriy Gorodnichenko:
Squeezed between European super powers, Ukraine is no stranger to tensions, but it has been a remarkably peaceful country in the modern history. The recent waves of protests and government-sponsored violence moved Ukraine to the brink of a civil war with far-reaching consequences for Europe as well as Russia and other post-communist countries in the region.
The Yanukovich Era and the uprising
How could Ukraine get into such a terrible state? What can happen next and what can be done to save peace in this country with a population of 45 million people?
When Ukraine separated from the former Soviet Union in 1991, it marked its first real era of independence since World War I. While other former Soviet states immediately found themselves controlled by corrupt and dictatorial regimes, Ukraine stood out in the strength of its political institutions and civil liberties.
The attachment of the population to the democratic process was illustrated most vividly in 2004 when Viktor Yanukovich –- at the time Ukraine’s prime minister –- first tried to be elected president through electoral shenanigans. That effort was met with widespread popular protests , dubbed the “Orange Revolution, ” which forced new (and fair) elections and the defeat of Yanukovich in favor of Victor Yushchenko, then a leader of the opposition and the freedom movement in Ukraine.
Unfortunately, political divisions among the Orange Revolution’s reformers generated a popular backlash, through which Yanukovich was legally elected president in 2010. Since then, he has systematically undermined the constitutional process and the rights of individuals in Ukraine. For example, political power has become increasingly concentrated in the hands of Yanukovich and his inner circle, virtually replacing the constitutionally-enshrined parliamentary nature of government with a presidential regime.
This concentration of power has been matched by rising levels of corruption, enriching Yanukovich’s family and inner circle while the Ukrainian economy has become progressively more impoverished. Television and radio stations are under the almost-exclusive control of the ruling party. Political opponents, such as the former Prime Minister Yulia Timoshenko, have been jailed and beaten. The rights of individuals have been increasingly curtailed, with new laws passed limiting freedom of speech, freedom of association and freedom of movement.
The recent protests began rather innocuously, as a result of Yanukovich turning away from accession to the European Union in response to an offer of financial aid and gas subsidies from Russia. But the heavy-handed response of authorities, including violent attacks on protesters, transformed a small-scale protest into a general popular uprising with hundreds of thousands of people descending daily on the main squares of Kiev and other Ukrainian cities in the middle of the bitter cold Ukrainian winter and the persistent risk of being beaten, imprisoned, and tortured.
A rising number of protesters have met with an increasingly violent response by authorities, including widespread arrests, torture and death. But as the protests have continued to grow, Yanukovich has begun to appear to cede some ground, with his prime minister resigning and some of the more heinous laws restricting personal freedoms being abridged. However, even now it’s not clear how sincere his moves are and if he is not just trying to buy himself some time to consolidate his powers for another crackdown on peaceful protesters.
Why lies ahead?
Given the size and intensity of recent protests, combined with the visible desperation of authorities, one can foresee at least four scenarios for the future of Ukraine.
1. A peaceful, political resolution: The most positive outcome is one in which Yanukovich accedes to immediate and free elections which put in place a new administration committed to rebuilding the institutions and civil liberties for which Ukrainians have fought so hard. But as discussed below, achieving such an outcome will not be easy, and failure could lead to other, less desirable outcomes.
2. A bloody victory for the protesters: If the authorities continue to respond to protesters with violence and torture what has so far remained a remarkably peaceful protest movement could rapidly become much more violent. There are certainly among the protesters some who would prefer to fight more aggressively against the authorities, and further provocations by the police or armed gangs hired by the government could give them cause to lash out. Violent uprisings have in the past often meant unsavory endings for authorities (e.g. Ceaucescu, Qadaffi), and the consequences of such an outcome would likely cast a long shadow over the future of the Ukrainian political process.
3. A victory for the regime: Yanukovich has already tried to buy out and divide the leadership of the protest movement by offering them prominent political roles, but this wooing has had little success. Given that protests have not faded despite the cold and the brutal response of the regime, a scenario in which protests peter out quietly is unlikely. But, if backed into a corner, the regime’s armed forces could overwhelm protesters and ensure the continuation of the regime. This would almost ensure that Yanukovich would reinforce his hold on power and become a dictator. The consequences for the Ukrainian people would be dire.
4. A civil war: The most dire outcome is one in which Yanukovich tries to put down the protests violently but unsuccessfully, thereby generating a civil war between the Ukraine’s Western and Eastern regions. A violent and persistent struggle between these factions would induce large-scale refugee movements into neighboring countries, instability on the border of Europe and Russia, and possible proliferation of the arms and nuclear materials currently held in Ukraine. This outcome could be catastrophic not just for Ukraine, but for the entire region (just imagine Syria in Europe with European energy supplies from Russia being cut).
What will success look like?
Achieving a successful and peaceful outcome appears to require that Yanukovich deliberately and willingly agree to surrender political power. Because this political power ensures both his wealth and personal protection, as well as that of his family and associates, achieving this outcome is fraught with difficulties. But the strength and endurance of the protest movement has made this unlikely outcome a possibility. Achieving it, however, will likely require several additional steps.
First, the international community can help by reducing the benefit Yanukovich receives from holding power. For example, countries can freeze foreign assets held by Yanukovich and his family. The international community can also help make a peaceful transition more likely by undermining the sources of support to the Yanukovich regime. For example, some of the oligarchs that have supported Yanukovich so far have been reticent to oppose the protests. Many could likely be induced to support a transition if access to foreign markets was facilitated for Ukrainian companies or if economic assistance is provided to the Ukrainian government during the transition period.
Because Russia is unlikely to continue its aid to Ukraine during a transition (and may likely try to hamper the transition itself), it will be essential for the international community to make up for this negative shock. The U.S. and Europe could threaten to freeze assets of oligarchs abroad, and restrict their travel to foreign countries if support for a transition process is not forthcoming. Finally, the international community must stand up to Putin directly to ensure that Russia does not unduly pressure or influence the situation in Ukraine.
The Ukrainian people are, of course, the primary agent through which change can happen. And their behavior during this difficult time, particularly in the face of appalling behavior by authorities, has been exemplary. Continuing to ensure that protests remain peaceful is central to enabling a peaceful exit by Yanukovich. Street violence and the threat of retribution would likely induce Yanukovich to instead cling to power.
So facilitating the protest movement –by providing financial aid, doctors, supplies, etc.–is a key contribution by the international community to a successful transition in Ukraine. Public backing, such as U.S. Sen. John McCain’s (R-Ariz.) recent visit to Maidan Square in Kiev, also provides direct support to protesters who are engaged in a long and brutal struggle and for whom sustaining their morale cannot be underestimated.
A successful outcome in Ukraine will be a victory for the forces of peace and democracy. The international community can help both through official policies of the U.S. and European governments and through the support of individuals. World War II and the Cold War were ultimately victories for freedom, but the struggle actually continues today in many countries. The international community should support those who continue this battle. Today’s front line is Maidan Square in Kiev, Ukraine. Success of protesters in Ukraine could be as important as the fall of the Berlin Wall was for the modern Europe.
From Kate Ho and Robin Lee:
We measure the impact of increased health insurer competition on negotiated hospital prices using detailed 2004 California claims data. We develop a theoretical bargaining model to motivate our empirical analysis, and use the competitiveness of Kaiser Permanente, a large vertically integrated insurer, in a hospital’s market as a measure of insurer competition. We find that increasing competition reduces hospital prices on average, but that the most attractive hospitals can leverage increased competition to negotiate higher rates. This bargaining effect creates incentives for further hospital consolidation and implies that hospital market power can impact prices even in markets with many insurers.
A very interesting paper from Anders Akerman, Ingvil Gaarder, Magne Mogstad:
Does adoption of broadband internet in firms enhance labor productivity and increase wages? And is this technological change skill biased or factor neutral? We exploit rich Norwegian data with firm-level information on value added, factor inputs and broadband adoption to answer these questions. We estimate production functions where firms can change their technology by adopting broadband internet. A public program with limited funding rolled out broadband access points, and provides plausibly exogenous variation of broadband adoption in firms. This enables us to address endogeneity of broadband adoption and examine how it shifts the production technology and changes the productivity and labor outcomes of different types of workers. We find that broadband adoption favors skilled labor by increasing its relative productivity. The increase in productivity of skilled labor is especially large for college graduates in fields such as science, technology, engineering and business. By comparison, broadband internet is a substitute for workers without high school diploma, lowering their marginal productivity. Consistent with the estimated changes in labor productivity, wage regressions show the expansion of broadband internet improves (worsens) the labor outcomes of skilled (unskilled) workers. We explore several possible explanations for the skill bias of broadband internet. We find suggestive evidence that broadband internet complements skilled workers in executing nonroutine abstract tasks, and substitutes for unskilled workers in performing routine tasks. When we use our production function estimates to construct measures of firm level productivity, we find that broadband internet accounts for a few percent of the standard deviation in total factor productivity across firms. Taken together, our findings have important implications for the ongoing policy debate over government investment in broadband infrastructure to encourage productivity and wage growth.
HT: Danny Yagan
From Jonathan Heathcote, Kjetil Storesletten, Giovanni Violante:
What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
From Larry Summers:
Inequality has emerged as a major issue in the US and beyond. A generation ago it could reasonably have been asserted that the overall growth rate of the economy was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.
The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalized and budget deficits have at last been addressed.
President Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective. Presidents from Franklin Roosevelt to Harry Truman railed against the excesses of a privileged few in finance and business. Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns. Richard Nixon used the same weapon in 1973, announcing tax investigations “of the books of companies which raised their prices more than 1.5 per cent above the January ceiling.” All were reacting in their own way to a phenomenon that Bill Clinton has described best: “Although America’s rich got richer . . . the country did not . . . the stock market tripled but wages went down.”
Given the widespread frustration with stagnant incomes, and an increasing body of evidence suggesting that the worst-off have few opportunities to improve their lot, demands for action are hardly unreasonable. The challenge is knowing what to do.
If income could be redistributed without damping economic growth, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately this is not the case. It is easy to think of policies that would have reduced the earning power of Bill Gates or Mark Zuckerberg by making it more difficult to start and profit from a business. But it is much harder to see how such policies would raise the incomes of the rest of the population. Such policies would surely hurt them as consumers by depriving them of the fruits of technological progress.
It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.
It is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play. The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor. For example, last year’s increase in the stock market represented an increase in wealth of about $6tn, of which the lion’s share went to the very wealthy.
It is unlikely that the government will collect as much as 10 per cent of this figure. That is because of a host of policies that favour the rich, such as the capital gains exemption, the ability to defer tax on unrealized capital gains, and the fact that gains on assets passed on at death are not taxed at all. Similarly, the corporate tax system allows value to flow through it like a sieve. The ratio of corporate tax collections to the market value of US corporations is near a record low. The estate tax can be more or less avoided with sophisticated planning.
Closing loopholes that only the wealthy can enjoy would enable taxes to be cut elsewhere. Measures such as the earned income tax credit can raise the incomes of the poor and middle class by more than they cost the Treasury, because they give people incentives to work and save.
It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences.