Economics Working Papers

(WP 2013-05) Future Implications of Debt and Deleveraging in the United States Economy

Abdur Chowdhury et al. — Fri, 10 May 2013 10:09:40 PDT

This paper will take a broad based approach in analyzing the structure of the U.S. economy with a particular emphasis on the disruptive U.S. recession and financial crisis which began circa 2008. The role of the U.S. government and the implications high levels of fiscal debt have on the projected growth path of the U.S. economy will be the primary focus of the paper. The discussion will show that the U.S. has likely entered a new, much more difficult stage in its history of economic growth. The short to medium term growth potential of the U.S. economy has fallen below the trend level established since WWII. The flexibility of the U.S. economy will help foster the necessary adjustments; however, this new era will force difficult fiscal and monetary policy choices that have different implications for different section of the population. The policy makers must recognize the changing dynamics of the U.S. economy and they must be prudent in drafting policy that establishes a stronger foundation for future growth. Younger generations in particular will need to take notice of the decisions being made and plan accordingly as it relates to their spending, saving and investment habits.

(WP 2013-04) Securitization of Credit Card Debt and its Determinants

Farrokh Nourzad et al. — Fri, 10 May 2013 09:54:39 PDT

(WP 2013-02) War and the Fiscal Capacity of the State

Abdur Chowdhury et al. — Thu, 04 Apr 2013 06:57:52 PDT

We examine the role of war in retarding state fiscal capacity in developing countries, measured by tax revenue ratios to GDP. This in contrast to the European experience from the Renaissance to the 20th century, where it is believed that war and state-building were inseparable, enhancing the fiscal capacity of the state; in turn enlarging the scope and magnitude of government expenditure. We build a simple theoretical model of a factionalized state, where patronage substitutes for common interest public goods, along with the possibility of violent contestation over a rent or prize, typically in the form of natural resource revenues. Our dynamic panel empirical analysis on the determinants of fiscal capacity is applied to 79 developing countries, during 1980-2010. Results indicate that war, especially in its current dominant form of civil war, retards fiscal capacity, along with imperfect democracy, political repression, the quality of governance, dependence on oil and macroeconomic mismanagement. High intensity conflict is particularly destructive of state capacity. Countries experiencing low intensity wars, other institutional factors may matter more for fiscal capacity formation compared to war. The diminution of state capacity due to war appears less pronounced after the end of the cold war.

(WP 2013-02) Economists’ Odd Stand on the Positive-Normative Distinction: A Behavioral Economics View

John B. Davis — Fri, 08 Mar 2013 14:01:08 PST

This chapter examines economists’ indefensible attachment to the positive-normative distinction, and suggests a behavioral economics explanation of their behavior on the subject. It reviews the origins of the distinction in Hume’s guillotine and logical positivism, and shows how they form the basis for Robbins’ understanding of value neutrality. It connects philosophers’ rejection of logical positivism to their rejection of the positive-normative distinction, explains and modifies Putnam’s view of fact-value entanglement, and identifies four main ethical value judgments that contemporary economists employ. The behavioral explanation of economists’ denial of these value judgments emphasizes loss aversion and economists’ social identity as economists.

(WP 2013-01) Economics Imperialism under the Impact of Psychology: The Case of Behavioral Development Economics

John Davis — Wed, 06 Feb 2013 11:34:37 PST

Economics imperialism is broadly explained as economics having an impact on other disciplines. But how should economics imperialism be understood when it is in some sense the product of other disciplines having an impact on economics? The paper examines psychology’s impact on economics in connection with the emergence of behavioral development economics, and then discusses the nature of behavioral development economics imperialism associated with development economists’ explanations of non-market dimensions of life in developing economies in behavioral economics terms. The paper argues that this new form of economics imperialism reflects economics’ selective appropriation from psychology of the Kahneman-Tversky heuristics and biases view of choice behavior and rejection of the Gigerenzer-ABC group fast and frugal heuristics view. This selective appropriation, however, causes behavioral development economics imperialism to also function as a social and cultural imperialism since its utility theory-based policy recommendations impose liberal society economic values on developing economy societies. Thus recent economics-plus-psychology imperialism might be said to function as social science imperialism under the leadership of economics

(WP 2012-01) Samuels on Methodological Pluralism in Economics

John Davis — Thu, 01 Mar 2012 12:38:54 PST

Warren Samuels was an influential proponent of methodological pluralism in economics. This short paper discusses his understanding of methodological pluralism, and argues that it is based on three distinct components: (1) his critique of the idea that theories have epistemic foundations and his 'matrix approach to meaningfulness,' (2) his belief that the absence of meta-principles for science combined with our human psychology create an existential dilemma for theorists and policy-makers, and (3) his understanding of relativism, social constructivism, and 'limited but affirmative' defense of nihilism against the charge of skepticism. The paper closes with a brief discussion of what Samuels' methodological pluralism might tell us about historiography and the history of economics.

(WP 2011-10) Obituary: Warren J. Samuels (1933-2011)

John Davis — Thu, 15 Dec 2011 11:51:40 PST

This paper examines the research and career of the late Warren J. Samuels (1933-2011), an influential institutionalist economist in the Wisconsin John Commons tradition and well-known historian and methodologist of economics. It discusses four main positions Samuels developed and held regarding the history of economic thought as intellectual history, the theory of economic policy, methodological pluralism, and the invisible hand doctrine. Among the views considered are: his matrix approach to meaningfulness, his characterization of intellectual systems, his emphasis on the centrality of the social order, his theory of economic policy as a neglected subject, his discourse analysis of language, his emphasis on the hermeneutic circle and critique of foundationalism, and argument that the invisible hand lacks ontological and epistemological credentials and functions as a means of social control and psychic balm. Much of the discussion is cast in terms of Samuels’ own reflections on what he believed is involved in being an historian of economics.

(WP 2011-09) The Development Effects of Natural Resources: A Geographical Dimension

Fabrizio Carmignani et al. — Mon, 07 Nov 2011 11:05:08 PST

Despite the recent growth resurgence, Sub-Saharan Africa (SSA) remains the poorest region in the world. At the same time, it is a region that heavily relies on natural resources. In this paper we investigate the extent to which the second fact helps explain the first one. The distinctive feature of our study is that we take a geographical perspective and allow the effect of natural resources to differ across regions of the world. Our findings suggest that (i) the effect of natural resource intensity on per-capita income is positive and significant in general, but almost negligible and possibly negative in SSA, (ii) natural resources have a negative effect on institutional quality in SSA only, (iii) natural resources hinder human capital accumulation in SSA much more than anywhere else, and (iv) the combination of bad disease environments and large resource endowments accounts for most of the observed cross-regional differences in the effect of natural resources.

(WP 2011-08) Identity

John Davis — Tue, 01 Nov 2011 07:22:25 PDT

This chapter introduces the economics and identity literature, and discusses the relationship between social identity and personal identity. It distinguishes categorical and relational types of social identities, and argues that the former are more readily associated with instrumentally rational behavior, while the latter, which involve close contact with others in roles and social positions, are more readily associated with behavior in which individuals unilaterally reciprocate the actions of others – what Bruni terms unilateral altruism, which involves a non-instrumental or deontological type of motivation. The chapter also distinguishes two views of personal identity as relational in nature, Bachrach's game-theoretic approach and one based on collective intentionality theory, and concludes by arguing that the Homo economicus view of personal identity is circular.

(WP 2011-07) Factoring Emerging Markets into the Relationship Between Global Liquidity and Commodities

Steven Landgraf et al. — Wed, 17 Aug 2011 08:52:21 PDT

What caused the mid-2000s world commodity price “bubble” and the recent commodity price growth during the economic recovery after the 2007-2009 recession? The classical “supply and demand” interpretation offered by some observers suggests that rapid global industrial growth over the past decade – the so-called “demand channel” – is the key driver of price growth. Others have argued that recent bouts of commodity price growth were directly related to central banks, especially the U.S. Federal Reserve, injecting too much money or “liquidity” into the financial system. They assert that high commodity prices are a result of excessively loose monetary policy.

This paper extends the current research in this area by incorporating emerging economies, the BRIC (Brazil, Russia, India, and China) nations specifically, into global measures. It is hypothesized that factoring BRIC nations into the analysis provides useful information for examining the relationship between commodity prices and global liquidity that is not captured by advanced country data alone.

The statistical model in this paper accounts for the two-way relationships that can exist between output, price, and monetary variables in a globally interconnected system. Various tests of the model consistently suggest that the “demand channel” plays a large part in explaining commodity price growth whether BRIC countries are included or excluded from the analysis. However, excess liquidity may also play a part in explaining price growth. In addition, factoring in BRIC country data leads to the conclusion that unexpected movements in liquidity eventually explain more of the variation in commodity prices than unexpected demand shocks. This specific result is not caught in the sample that only incorporates advanced economies. Therefore, policymakers and researchers should not ignore emerging markets when examining commodity prices and monetary factors in a global context. Studies that exclude these countries lose key information on the effects of global monetary fluctuations.

(WP 2011-06) Do Stock Market Risk Premium Respond to Consumer Confidence?

Abdur Chowdhury — Mon, 15 Aug 2011 09:32:52 PDT

During the 2007-9 Great Recession, the risk premium associated with U.S. stocks sharply increased and has since remained significantly higher compared to its range during the last 40 years. The increase in the equity risk premium has led many analysts to believe that risk aversion among stock investors has moved to a permanently higher range in recent years. Our empirical findings show that the recent increase in the equity risk premium primarily reflects a temporary collapse in consumer confidence. As long as the consumer confidence in the sustainability of economic recovery remains low, today's elevated risk premium would persist. Once the confidence level starts to recover - as it has done after every recession since the 1960s - the required return among stock market investors should also diminish.

(WP 2011-05) 'Til Recession Do Us Part: Booms, Busts, and Divorce in the United States

Abdur Chowdhury — Mon, 18 Jul 2011 09:19:35 PDT

A general hypothesis regarding the impact of permanent income levels and business cycle fluctuations on divorce rate at the state level in the United States is analyzed in the paper. Using data for 45 states over the 1978-2009 sample period, the paper shows that the higher the level of transitory income, the higher is the incidence of divorce. In other words, divorce is pro-cyclical. Why do divorce decrease during recession and increase during expansion? When an economy is in crisis and people’s incomes are low, the cost of divorce will prevent a couple from divorcing irrespective of the quality of their marriage. In this case, divorce is not an effective option. Extending this reasoning to the Great Recession of 2007-9, it can be argued that scarce employment opportunities and reductions in the value of martial assets had forced couples to remain together, notwithstanding marital difficulties. As the economy moved into a slow and moderate recovery beginning in mid-2009, this pent-up demand for divorce was released and the rates increased. That, in large part, is why divorce generally follow a ‘pro-cyclical’ course, fluctuating in sympathy with the economy.

(WP 2011-04) Inflation and Inflation-Uncertainty in India: The Policy Implications of the Relationship

Abdur Chowdhury — Wed, 29 Jun 2011 08:59:00 PDT

Inflation and its related uncertainty can impose costs on real economic output in any economy. This paper analyzes the relationship between inflation and inflation uncertainty in India. Initial estimates show the inflation rate to be a stationary process. The maximum likelihood estimates from the GARCH model reveal strong support for the presence of a positive relationship between the level of inflation and its uncertainty. The Granger causality results indicate a feedback between inflation and uncertainty. With Granger causality running both ways, the Friedman-Ball and Cukierman-Meltzer hypotheses hold simultaneously in India. It provides strong support to the notion of an opportunistic central bank in India.

(WP 2011-03) State Government Revenue and Expenditures: A Bootstrap Panel Analysis

Abdur Chowdhury — Tue, 19 Apr 2011 11:11:49 PDT

The current fiscal crises that most states in the United States are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. In this context, this paper explores the issue of temporal priority between government expenditures and revenue at the state and local levels. The results show that there is no uniform relationship between government revenue and spending across different states in the US. In fact, about 40% of the states show the absence of any temporal relationship between these two variables. This is quite revealing given the current state of the debate in the academic and policy-making circle. A support for the tax-spend hypothesis is found in 18% of the states while the spend-tax hypothesis is prevalent in another 16%. In 26% of the states, the revenue and expenditures decisions are jointly determined by the government.

(WP 2011-02) The Change in Sraffa's Philosophical Thinking

John Davis — Tue, 11 Jan 2011 06:37:49 PST

The availability of Piero Sraffa’s unpublished manuscripts and correspondence at Trinity College Library, Cambridge, has made it possible to begin to set out a more complete account of Sraffa’s philosophical thinking than previously could be done with only his published materials and the few comments and suggestions made by others about his ideas, especially in connection with their possible impact on Ludwig Wittgenstein’s later thinking. This makes a direct rather than indirect examination of Sraffa’s philosophical thinking possible, and also shifts the focus from his relationship to Wittgenstein to his own thinking per se. I suggest that the previous focus, necessary as it may have been prior to the availability of the unpublished materials, involved some distortion of Sraffa’s thinking by virtue of its framing in terms of Wittgenstein’s concerns as reflected in the concerns of scholars primarily interested in the change in the his thinking. This paper seeks to locate these early convictions in this historical context, and then go on to treat the development of Sraffa’s philosophical thinking as a process beginning from this point, arguing that his thinking underwent one significant shift around 1931, but still retained its early key assumptions. Thus the approach I will take to Sraffa’s philosophical thinking is to explain it as a process of development largely within a single framework defined by his view of how modern science determines the scope and limits upon economic theorizing.

(WP 2011-01) Kenneth Boulding as a Moral Scientist

John Davis — Tue, 04 Jan 2011 12:41:20 PST

Kenneth Boulding’s AEA presidential address argued that economics is a moral science. His view derived from his general systems theory thinking, his three systems view of human society, and his early contributions to evolutionary economics. Boulding’s argument that economics could not be value-free should be distinguished from other well-known views of economics as a moral science, such as Gunnar Myrdal’s. This paper discusses the development and nature of Boulding’s thinking about economics as a moral science in the larger context of his thinking.

(WP 2010-11) The Benefits of Environmental Improvement: Estimates From Space-time Analysis

John I. Carruthers et al. — Mon, 27 Sep 2010 11:55:25 PDT

This paper develops estimates of environmental improvement based on a two-stage hedonic price analysis of the single family housing market in the Puget Sound region of Washington State. The analysis — which focuses specifically on several EPA-designated environmental hazards and involves 226,918 transactions for 177,303 unique properties that took place between January 2001 and September 2009 — involves four steps: (i) ten hedonic price functions are estimated year-by-year, one for each year of the 2000s; (ii) the hedonic estimates are used to compute the marginal implicit price of distance from air release, superfund, and toxic release sites; (iii) the marginal implicit prices, which vary through time, are used to estimate a series of implicit demand functions describing the relationship between the price of distance and the quantity consumed; and, finally (iv) the demand estimates are compared to those obtained in other research and then used evaluate the potential scale of benefits associated with some basic environmental improvement scenarios. Overall, the analysis provides further evidence that it is possible to develop a structural model of implicit demand within a single housing market and suggests that the benefits of environmental improvement are substantial.

(WP 2010-10) Assessing the Predictive Power of Labor-Market Indicators of Inflation

Farrokh Nourzad — Mon, 27 Sep 2010 11:47:21 PDT

This paper examines two different measures of wages as predicators of prices in a vector error-correction framework using quarterly data for the U.S. for the period from 1947.Q1 through 2008.Q1. Based on cointegration and a series of exogeneity tests, it is found that: 1) there is a stable, long-run relationship between the Consumer Price Index (CPI) and the Personal Consumption Expenditure Deflator (PCED) on the one hand and unit labor costs (ULC) and average earnings per unit of output (AHE) on the other; 2) ULC is weakly exogenous for both price indices while the two price indices are weakly exogenous for AHE; 3) ULC is strongly exogenous for CPI but not for AHE; 4) ULC is super exogenous for CPI. Taken together, these findings lead to the conclusion that ULC is a reliable indicator of price inflation but productivity-adjusted hourly earnings is not. Thus monetary policymakers are justified in using information about the behavior of ULC in formulating policy actions for achieving the goal of price stability.

*This research has been financed in part by a grant from the Center for Global and Economic Studies at Marquette University.

**A short version of this paper is forthcoming in Applied Economics Letters.

(WP 2010-09) Does Money Matter? An Empirical Investigation

Barry Huston et al. — Mon, 27 Sep 2010 11:36:58 PDT

This paper uses a simultaneous-equations model of the new consensus macroeconomic model to examine whether the inclusion of the money stock in the aggregate demand function improves the statistical fit of the model. The results indicate that the consensus model is accurate for the U.S. in that the inclusion of money does not increase the predictive power of the model. However, the results reveal that the estimated coefficients are more robust when money is included as an instrumental variable in the simultaneous equations consensus model.

(WP 2010-08) Neuroeconomics: Constructing Identity

John B. Davis — Mon, 27 Sep 2010 11:21:56 PDT

This paper asks whether neuroeconomics will make instrumental use of neuroscience to adjudicate existing disputes in economics or be more seriously informed by neuroscience in ways that might transform economics. The paper pursues the question by asking how neuroscience constructs an understanding of individuals as whole persons. The body of the paper is devoted to examining two approaches: Don Ross’s neurocellular approach to neuroeconomics and Joseph Dumit’s cultural anthropological science organization approach. The accounts are used to identify boundaries on single individual explanations. With that space Andy Clark’s external scaffolding view and Nathaniel Wilcox’s socially distributed cognition view are employed.