Six Figure Deal for Economist Claudia Goldin, Jill Kneerim, Princeton University Press

In a significant six-figure deal, Joe Jackson, senior editor for economics and finance at Princeton University Press, has acquired world rights for all languages and audio to A LONG ROAD: THE QUEST FOR CAREER AND FAMILY by Harvard economist Claudia Goldin. Agents Jill Kneerim and Lucy V. Cleland at Kneerim & Williams handled the deal.

© Bryce Vickmark. All rights reserved. www.vickmark.com 617.448.6758

A LONG ROAD is a dynamic, comprehensive survey of a century of college women’s options, obstacles, and progress in work and family. Goldin delivers a fresh understanding of one of the most intractable problem in today’s economy—the gender earnings gap—by exploring five distinct groups of women of modern history, who collectively trace how we got here, and why. Filled with startling insights into the forces that have catalyzed real change in women’s choices and definitions of success, A LONG ROAD interweaves captivating stories with decades of deeply-sourced, original data to illuminate how the structure of work and other systemic issues are the primary causes of gender disparities. This multi-layered work debunks long-held presumptions and inadequate theories by accurately diagnosing why—despite exceptional, meaningful strides made throughout the 20th century—a large fraction of highly talented women still cannot achieve both an equitable family life and a successful career…but not for the reasons we’ve been led to believe. This urgent book will elevate the cultural conversation, allow the collective past to help make sense of our turbulent present, and point the way toward true gender equity, both in our homes and workplaces.

Professor Goldin is the Henry Lee Professor of Economics at Harvard University. From 1989 to 2017, she served as the director of the National Bureau of Economic Research’s Development of the American Economy program.

A LONG ROAD is slated for publication in 2021. 

 

Should We Celebrate Mother’s Day Every Week?

Doepke, Zilibotti, Love, Money, and Parenting book coverThe modern Mother’s Day holiday in the United States was first celebrated in 1908 in a time of strictly separated gender roles. While some single women were working for pay, married women were usually out of the labor force. Indeed, so called “marriage bars” formally prohibited the employment of married women in many occupations. With much of paid work reserved for married men, married women had to shoulder most of the burden of unpaid work, including caring for children, on their own.

No wonder, then, that there was a perceived need at a time for an occasion to specifically celebrate mothers. When mothers were working without pay and little other formal or informal recognition, a dedicated holiday provided at least an occasional opportunity to honor mothers’ profound contributions to their families and society at large.

But gender roles have evolved a long way since 1908. Bars against women’s employment in the labor market were gradually lifted, and after World War II many married women, including mothers, joined the labor force. Today, a large majority of mothers combines raising children with working for pay.

Conversely, fathers have become more involved in childcare. Until the 1970s, men’s participation in child-rearing was minimal, but today fathers take an increasingly active role in caring for their children. Fathers now spend considerably more time with their children and are less likely to be found in the bar or on the golf course compared to earlier generations.

These changes might suggest that today, there is less need for a mothers-only holiday. In the interest of gender equality, might it be time to abandon the gender-specific celebrations of Mother’s Day and Father’s Day in favor of the single, inclusive “Parents’ Day”?

A closer look at the numbers suggests that, in fact, we need just the opposite – namely a Mother’s Day every week.

While differences in gender roles have become smaller over time, women continue to do a lot more childcare than men, not just in the United States, but across all economically advanced economies. Data from the OECD (a club of mostly rich countries) shows that women still do on average two-thirds of unpaid work in the economy, of which childcare is a major component. Gender equality in this dimension is almost in reach in Sweden, where women do 56 percent of unpaid work, compared to 63 percent in the United States. East Asian countries have the longest way to go: in Japan and Korea women still do more than 80 percent of unpaid work.

While some of these differences reflect that men spend more time working for pay, that is only part of the story. Women do the majority of housework and childcare even among couples where both spouses are working full time. As a result, women end up with less free time: across all OECD countries, women enjoy less leisure than men do.

In the United States, the change in gender roles actually has slowed in recent decades. Women’s labor force participation rose quickly from the 1970s to the 1990s but has stalled since, and is now lower than in many European countries.

The nature of motherhood has also been affected by a transformation in the nature of parenting in recent decades. We describe in our book Love, Money, and Parenting: How Economics Explains the Way We Raise Our Kids how sharply rising inequality has raised the stakes in parenting starting in the 1980s. While in the 1960s and 1970s obtaining a high-school degree came with the expectation of a secure future as members of the middle class, after decades of stagnation in median earnings in the economy by now only a college degree can provide the same level of security.

American parents responded to this changed environment by adopting more time-intensive parenting styles geared at helping their children succeed in a harsh economic climate. Typical couples now spend twice as much time on caring for their children than what was typical in the 1970s. Activities aimed at supporting children’s educational achievement, such as helping them with homework, rose the fastest.

This trend towards intensive parenting has contributed to a persistent gap in the parenting engagement of mothers and fathers. As parenting became more intense, fathers’ contribution went from very little to substantial. But in absolute terms, mothers increased their time spent on parenting even faster. As a result, mothers now have a full five hours less of leisure time per week compared to the 1970s.

Given these numbers, there are good reasons to use this Mother’s Day not just for thanking mothers for everything they do for their children and their families, but also to consider what can be done for the long-run trend toward more gender equality to resume. American women already get more education and are substantially more likely to graduate from college than men. But women will not be able to make full use of these skills in the labor market and have equal career opportunities until fathers carry a fair share of the load of parenting.

What would help, therefore, is a Mother’s Day every week –  reshuffling one-seventh of mothers’ weekly childcare duties to fathers would still fall well short of equality, but it would be a good start toward closing the gap.

Matthias Doepke is professor of economics at Northwestern University. Fabrizio Zilibotti is the Tuntex Professor of International and Development Economics at Yale University. They are the coauthors of Love, Money, and Parenting.

Rachel McCleary and Robert Barro on The Wealth of Religions: The Political Economy of Believing and Belonging

mcclearyWhich countries grow faster economically—those with strong beliefs in heaven and hell or those with weak beliefs in them? Does religious participation matter? Why do some countries experience secularization while others are religiously vibrant? In The Wealth of Religions, Rachel McCleary and Robert Barro draw on their long record of pioneering research to examine these and many other aspects of the economics of religion. Places with firm beliefs in heaven and hell measured relative to the time spent in religious activities tend to be more productive and experience faster growth. Going further, there are two directions of causation: religiosity influences economic performance and economic development affects religiosity. Dimensions of economic development—such as urbanization, education, health, and fertility—matter too, interacting differently with religiosity. State regulation and subsidization of religion also play a role. Timely and incisive, The Wealth of Religions provides fresh insights into the vital interplay between religion, markets, and economic development.

How did you come to write the book?

Robert is an economist and Rachel is a moral philosopher. In thinking about religion, we took as our starting point the work of Adam Smith, the founder of economics, who believed that moral values and organized religion were key forces in political economy and society. Nevertheless, social scientists—particularly economists and political scientists—have tended to underestimate the importance of religion, particularly the role of beliefs and values. We think that Adam Smith was right. Beliefs and religiosity are central determinants of which societies prosper and which deteriorate.

What does your book bring to the conversation on the economics of religion that hasn’t been discussed before?

Another contribution to the study of religion is bringing together the ideas of Adam Smith with those of the German sociologist Max Weber. Religious beliefs and values motivate people to behave in certain ways. This view, as we discuss in our book, is integral to forms of Protestantism with its emphasis on unmediated, individual responsibility for one’s salvation. We bring a quantitative approach to the relationship between beliefs, values, and economic behavior. In so doing, we examine the role of religious beliefs across world religions and countries. Our research has an international perspective with a focus on believing and belonging in the major religions of the world.

We focus on the role of religious beliefs and belonging to organized religions in the economic, political, and social development of nations and individuals. We are filling an important gap in the literature on religion by providing an international perspective. Much of the work in the sociology of religion is focused on local or regional patterns of religiosity. The sociology of religion has a strong focus on the United States, centering research around assumptions about religious patterns and organizations in the United States. In our research, we apply economic analysis to world religions and across countries.

How does religion fit into the story of developing nations? Does religious fervor help or hinder efforts to increase economic development?

To better understand the relationship between religion and economic growth, we need to look at a two-way causation. Religiosity has a two-way interaction with political economy. With religion viewed as the dependent variable, a central question is how economic development and political institutions affect religious participation and beliefs. There is a clear overall pattern whereby economic development associates with decreasing religiosity. However, there is no evidence that greater education diminishes religious beliefs.

Looking at the other direction of causation with religion as the independent variable, we study the effects of religion on economic, social, and political behavior. A key issue is how religiousness affects individual traits such as diligence, honesty, thrift, and integrity, thereby influencing productivity and economic performance. Another channel involves religion’s effects on literacy and education (human capital) more broadly. For example, there is evidence that Protestantism is more favorable than Catholicism as an influence on education and work ethic.

We find that social capital and cultural aspects of religion—communal services, rituals, religious schools—are significant mainly to the extent that they influence beliefs and, hence, behavior. For given beliefs, more time spent on communal activities would tend to be an economic drag for the believer as well as the entire community. Moreover, the costs of formal religion include the time spent by adherents and religious officials on religious activities. In addition, time and money are expended on buildings, sacred objects, and so on. Our general view, based on empirical evidence, is that believing relative to belonging (attending) is the main channel through which religion matters for economic and other social outcomes.

Can religion help to explain why some nations develop faster than others?

We found evidence that economic growth was stimulated when religious beliefs were high compared to religious participation. This pattern applied, for example, to Japan and parts of Western Europe. An overall expansion of religiousness—greater beliefs accompanied by the typically associated attendance at formal religious services—was not strongly related to growth. Religiously sponsored laws and regulations hindered economic growth in some places, notably in Muslim countries, which typically did not have favorable institutions with respect to corporations, credit markets and insurance, and inheritance.

How did the conflict between Protestantism and the Catholic Church affect economic development in early modern Europe? Do we still see the impact of that today?

As Max Weber argued, the rise of Protestantism beginning with the Reformation in the 1500s enhanced work ethic and the accumulation of human capital and, thereby, contributed to the industrial revolution. We found evidence that this mechanism still operated in Western Europe in the modern era.

Competition increases the quality of services provided by different religions. The introduction of Protestantism into Western Europe challenged the monopolistic status of the Roman Catholic Church, pressuring that organization to respond in two ways. First, by lowering the nature and pricing of religious goods, the Catholic Church sought to retain believers. Second, the Catholic Church promoted those aspects of its theology that distinguished it from other religions.

We discuss in our book how the beatification of saints is a unique mechanism of the Catholic Church. With the rise of Evangelical faiths, religious competition became particularly strong in Latin America, vernacularly referred to as “The Catholic continent,” where Catholicism had enjoyed a monopoly since the region was colonized by Spain in the 1400s. Today, in regions of the world where competition with types of Protestantism is increasing, the beatification of local saints revives religious fervor and deters adherents from converting to types of Protestantism.

Is religious fervor impacted by fluctuations in the economy? If so, how?

There is evidence that adverse economic shocks and natural disasters tend to increase the demand for religion. This pattern has been observed, for example, for earthquakes in Italy, flood-related declines in agricultural harvests in Egypt, declines in incomes during the Asian Financial crisis, and adverse effects from a poorly designed land reform in Indonesia. In the other direction, increased economic development—particularly movements away from agriculture and toward urbanization—tend to lower the demand for religion. However, it is wrong to conclude that sustained economic growth causes religion to disappear.

What do you hope readers will take away from reading this book?

We hope our readers will appreciate the possibilities of interdisciplinary research on a variety of religion topics. The application of economic ideas to religion broadens our understanding of ways in which beliefs and practices influence individual and group behavior.

We find that social capital and cultural aspects of religion—communal services, rituals, religious schools—are significant mainly to the extent that they influence beliefs and, hence, behavior. For given beliefs, more time spent on communal activities tend to be an economic drag for the believer as well as the entire community. The costs of formal religion include the time spent by adherents and religious officials on religious activities and the time and money expended on buildings, sacred objects, and so on. Our general view, based on empirical evidence, is that believing relative to belonging (attending) is the main channel through which religion matters for economic and other social outcomes.

Rachel M. McCleary is lecturer in the Department of Economics at Harvard University. Her books include The Oxford Handbook of the Economics of ReligionRobert J. Barro is the Paul M. Warburg Professor of Economics at Harvard. His books include Education Matters: Global Schooling Gains from the 19th to the 21st Century and Economic Growth. They both live in Massachusetts.

John Quiggin on Economics in Two Lessons

Quiggin_Economics in Two Lessons_S19Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets. Here, he explains why two-lesson economics means giving up the dogmatism of laissez-faire as well as the reflexive assumption that any economic problem can be solved by government action.

How did you come to write this book?

The idea was to offer a progressive response to Henry Hazlitt’s Economics in One Lesson, a free-market tract that remains in print seventy years after its initial publication. I originally intended it to focus on microeconomic ‘market failures’ like monopoly and air pollution. However, perhaps because the title claimed so much, the project grew to encompass the whole of economics, including macroeconomic issues such as unemployment and the business cycle, and the fundamental question: Who gets what?

What  is the core idea of the book ?

The core idea of the book is the concept of opportunity cost, which I define as follows:

The opportunity cost of anything of value is what you must give up so that you can have it.

Opportunity cost applies at the social level as well.

The social opportunity cost of anything of value is what you and others must give up so that you can have it.

Sometimes but not always, individual and social opportunity cost align as a result of what Adam Smith called the ‘invisible hand’ of the market. The core of economic policy is to determine when social and private opportunity costs differ, and what can be done about it. At least in a qualitative sense, most of the issues in economic policy can be understood with anapplication of opportunity cost reasoning. The technical analysis that forms the basis of most economics courses is only needed if you want to obtain quantitative estimates.

What is the ‘first lesson’ ?

Hazlitt doesn’t spell out his ‘one lesson’ properly, saying only that it is necessary to trace all the economic effects of any act of policy all the way to their conclusions, rather than relying on immediate benefits and surface appearances. This is a restatement of the title of Hazlitt’s main inspiration, Bastiat’s classic nineteenth-century work ‘That which is seen, and unseen’. Hazlitt implicitly assumes that once all the consequences of any act or policy are taken into account, the opportunity costs of government action to change economic outcomes always exceed the benefits.

The central idea underlying the claim made by Bastiat and Hazlitt is that market prices tell us everything we need to know about opportunity costs. This isn’t always true, but the kernel of truth is embodied in Lesson One, as I call it.

Lesson One: Market prices reflect and determine opportunity costs faced by consumers and producers.

The first part of the book shows why Lesson One is so important, and gives applications to a wide range of issues.

So what is Lesson Two ?

Economists have long known that, under conditions of ‘market failure’, market prices may not reflect opportunity costs, and that in these circumstances there is a case for government action to yield improved outcomes. The classic examples include air pollution and other ‘externalities’, monopoly and the exercise of market power, information problems and public goods such as scientific research. This leads directly to my Lesson Two.

Lesson Two: Market prices don’t reflect all the opportunity costs we face as a society.

I originally planned a book in which Lesson Two would have been all about market failure; that book would have been finished much sooner. As I worked on the book, though, I felt dissatisfied. I started to think more about the problems of unemployment and growing inequality, and realised that these were both examples of Lesson Two.

In a recession or depression, markets, and particularly labor markets, don’t properly match supply and demand. This means that prices, and particularly wages reflect or determine opportunity costs.  Looking hard at the data, I concluded that a market economy is in recession, in this sense, as often as not.

As regards the distribution of income and wealth, the market outcome depends on the system of property rights from which it is derived.  The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households. Over recent decades, changes to property rights of all kinds have consistently driven society in the direction of greater inequality.

So, we need Economics in Two Lessons.

Are there really only two lessons, or are there many?

The ‘two lessons’ set out the principles for reasoning about prices and opportunity cost. Any number of implications can be drawn about specific economic issues. Among the lessons drawn in the book are:

* There is such a thing as a free lunch.
* If you want to help poor people, give them money.
* There is no ‘silver lining’ to the destruction caused by war and natural disasters.
* Advertising generally makes us worse off.
* A carbon price would be the best response to climate change (but it’s unlikely to happen any time soon).

There’s plenty more in the book, and plenty more yet to be written.

John Quiggin is the President’s Senior Fellow in Economics at the University of Queensland in Brisbane, Australia. His previous book, Zombie Economics: How Dead Ideas Still Walk among Us (Princeton), has been translated into eight languages. He has written for the New York Times and the Economist, among other publications, and is a frequent blogger for Crooked Timber and on his own website: www.johnquiggin.com. Twitter @JohnQuiggin

 

 

William L. Silber: Invest Like Buffett…Buy Silver When It’s Cheap, but Don’t Repeat his Mistake

The global economy in 2019 may seem unsettled because of trade wars and friction in the European Union, but it is nothing compared with the Great Recession. Few worry today about the collapse of the world financial system, a serious concern ten years ago, and the decline of precious metal prices since then confirms that most investors do not expect a return of that sentiment. Which makes it the perfect time for Americans to learn a lesson from the recent history of the country’s most famous investor: Warren Buffett. He bought silver after it had collapsed in value but left more than four billion dollars on the table by selling too soon. 

Buffett is a contrarian, making investments that are unpopular and waiting for them to return to favor. He says: “You pay a very high price…for a cheery consensus…pessimism drives down prices to truly attractive levels.” This approach suggests that now is a good time to buy precious metals and to keep them for the long haul. Gold and silver are not popular today, but they should be viewed as insurance policies for everyday Americans. Both metals work when nothing else does, like during the Great Recession, when silver quadrupled in value between 2008 and 2011, and gold rose by 250 percent. Those increases mirrored the performance of precious metals 30 years earlier, in 1979, at the peak of the Great Inflation, when fear of runaway consumer prices had taken hold.

Warren Buffett, CEO of Berkshire Hathaway, bought silver in 1997 because it was cheap. The white metal had dropped more than 90 percent from its record price of $50 an ounce in January 1980. It was almost twenty years after Paul Volcker, Chairman of the Federal Reserve System, had cured the inflationary spiral that had griped the U.S. economy and Buffett pounced. He bought at the right time but sold much too soon and said, “I bought it very early and sold it very early.” Buffett’s experience provides guidelines for how to see precious metals today.

Buffett’s purchase of more than 100 million ounces of silver, about 25 percent of the world’s annual production of the white metal in 1997, was deeply out of character. The white metal did not belong among his investments. He had prided himself on picking companies that are “understandable, possess excellent economics, and are run by outstanding people.” Buffett traditionally dismissed owning assets like precious metals that “will never produce anything, but that are purchased in the buyer’s hope that someone else…will pay more for them in the future.” His least favorite investment is gold which he said would “remain lifeless forever.”

The CEO of Berkshire Hathaway gave silver a reprieve because the white metal is a cross between precious and industrial, a store of wealth for millions and productive in electronics and medicine. He explained his reasons for the investment, which totaled about two percent of Berkshire Hathaway’s portfolio: “I concluded that a higher price would be needed to establish equilibrium between supply and demand.” Buffett liked silver because annual consumption by industry outpaced mine production.

And Buffett was ideally positioned to benefit from silver’s low prices. The Berkshire Hathaway CEO had long understood the power of patience, having told his stockholders when he first bought Coca Cola stock in 1988, “Our favorite holding period is forever.” Patience is key to maximizing value from precious metals.

As it turned out, however, Buffett failed to stick to his principles, with serious consequences. An expanding U.S. economy spurred prices to about $7.50 in 2005 and Buffett began to worry about excess speculation. A year later he told his investors at their annual meeting that Berkshire Hathaway had sold all its silver. Buffett said “We made a few dollars,” but he was not pleased. Berkshire had earned about $275 million on an investment of $560 million in 1997, about a five percent annual return over the eight years, less than they would have earned investing in U.S. Treasury bonds. Buffett’s partner, Charlie Munger deadpanned, “I think we’ve demonstrated our expertise in commodities, if you look at our activities in silver.” Buffett added “We’re not good at figuring out when a speculative game will end.”

He did not realize the party was about to begin.

On September 15, 2008, Lehman Brothers filed for bankruptcy. It was the largest Chapter 11 filing in American history, and turned a mild recession into the worst financial crisis since the Great Depression. The failure destroyed trust in financial assets, triggered panicked withdrawals from money market mutual funds, until then considered the equivalent of cash, and forced the U.S Treasury to guarantee their safety.

The exploding financial chaos eventually sparked gold prices to an all-time record of $1,900 an ounce on September 5, 2011, an increase of 250 percent in the three years since Lehman’s collapse. Silver hit $42.92 that same day, for a 400 percent increase, almost twice the move in gold. Buffett’s uncharacteristic impatience, therefore, cost him dearly. Had Berkshire Hathaway sold at $42.92 on September 5, 2011, well below the $48 crisis peak, he would have made $4.2 billion on his investment of $560 million. His 14-year silver speculation would have earned a respectable 16.5 percent annual return.

No one expects to sell at the top so precious metals should remain in an investor’s portfolio forever, just like Warren Buffett’s Coca Cola. His allocation of two percent to silver makes sense — not too much to cause insomnia, but enough to provide for food, clothing and a driverless car during the next crisis. Today, we have recovered from the Great Recession, and precious metals are out of favor, a prime time for a contrarian purchase. Silver has declined to about $15 an ounce, one-third its 2011 peak, so it is relatively cheap to insure against the next financial upheaval. Once you’ve bought it, don’t touch it. Selling would be like cancelling insurance after an accident.

William L. Silber is the Marcus Nadler Professor of Finance and Economics at New York University’s Stern School of Business. His many books include When Washington Shut Down Wall Street (Princeton) and Volcker (Bloomsbury). He lives in Teaneck, New Jersey.

Opportunity costs: can carbon taxing become a positive-sum game?

Climate change, caused by human activity, is arguably the biggest single problem facing the world today, and it is deeply entangled with the question of how to lift billions of people out of poverty without destroying the global environment in the process. But climate change also represents a crisis for economists (I am one). Decades ago, economists developed solutions – or variants on the same solution – to the problem of pollution, the key being the imposition of a price on the generation of pollutants such as carbon dioxide (CO2). The idea was to make visible, and accountable, the true environmental costs of any production process. 

Carbon pricing could stabilise the global climate, and cap unwanted warming, at a fraction of the cost that we are likely to end up paying in other ways. And as emissions were rapidly reduced, we could save enough to compensate most of the ‘losers’, such as displaced coal miners; a positive-sum solution. Yet, carbon pricing has been mostly spurned in favour of regulatory solutions that are significantly more costly. Why?

Environmental pollution is one of the most pervasive and intractable failures of market systems (and Soviet-style central planning). Almost every kind of economic activity produces harmful byproducts, which are costly to dispose of safely. The cheapest thing to do is to dump the wastes into waterways or the atmosphere. Under pure free-market conditions, that’s precisely what happens. Polluters pay nothing for dumping waste while society bears the cost.

Since most energy in modern societies comes from burning carbon-based fuels, solving this problem, whether through new technology or altered consumption patterns, will require changes in a vast range of economic activities. If these changes are to be achieved without reducing standards of living, or obstructing the efforts of less developed countries to lift themselves out of poverty, it is important to find a path to emissions reduction that minimises costs.

But since pollution costs aren’t properly represented in market prices, there’s little use in looking at the accounting costs that appear in corporate balance sheets, or the market-based costs that go into national accounting measures such as Gross Domestic Product (GDP). For economists, the right way to think is in terms of ‘opportunity cost’, which can be defined as follows: The opportunity cost of anything of value is what you must give up so that you can have it. So how should we think about the opportunity cost of CO2 emissions?

We could start with the costs imposed on the world’s population as a whole from climate change, and measure how this changes with additional emissions. But this is an impossibly difficult task. All we know about the costs of climate change is that they will be large, and possibly catastrophic. It’s better to think about carbon budgets. We have a good idea how much more CO2 the world can afford to emit while keeping the probability of dangerous climate change reasonably low. A typical estimate is 2,900 billion tonnes – of which 1,900 billion tonnes have already been emitted.

Within any given carbon budget, an additional tonne of CO2 emitted from one source requires a reduction of one tonne somewhere else. So, it is the cost of this offsetting reduction that determines the opportunity cost of the additional emission. The problem is that, as long as the CO2 generated ‘disappears’ into the atmosphere (and, eventually, the oceans), corporations and households do not bear the opportunity cost of the CO2 they emit.

In a properly working market economy, prices reflect opportunity costs (and vice versa). A price for CO2 emissions high enough to keep total emissions within the carbon budget would ensure that the opportunity cost of increasing emissions would be equal to the price. But how can this be brought about?

In the 1920s, the English economist Arthur Pigou suggested imposing taxes on firms generating pollution. This would make the (tax-inclusive) prices paid by those firms reflect social cost. An alternative approach, developed by the Nobel laureate Ronald Coase, stresses the role of property rights. Rather than setting a price for pollution, society decides how much pollution can be tolerated, and creates property rights (emissions permits) reflecting that decision. Companies that want to burn carbon must acquire emissions permits for the CO2 they produce. Whereas the carbon-tax approach determines a price and lets markets determine the volume of polluting activity, the property-rights approach sets the volume and lets the market determine the price.

There is no necessary link between imposing a carbon tax and distributing the resulting payments. However, natural intuitions of justice suggest that the revenue from carbon pricing should go to those adversely effected. At a national level, the proceeds could be used to offset the costs borne by low-income households. More ambitiously, a truly just system of global property rights would give everyone equal rights, and require those who want to burn more than their share of carbon (mostly, the global rich) to buy rights from those who burn less.

This raises the question of whether emissions rights should be equalised going forward, or whether historical emissions should be taken into account, allowing poorer nations to ‘catch up’. This debate has been rendered largely irrelevant by dramatic drops in the price of renewable energy that have sidelined development strategies based on fossil fuels. The best solution seems to be ‘contract and converge’. That is, all nations should converge as fast as possible to an emissions level far below that of currently developed countries, then phase out emissions entirely.

Carbon taxes have already been introduced in various places, and proposed in many more, but have met with vigorous resistance nearly everywhere. Emissions-permit schemes have been somewhat more successful, notably in the European Union, but have not taken off in the way envisaged when the Kyoto Protocol was signed in 1997. This disappointing outcome requires explanation.

The ideas of Pigou and Coase provide a theoretically neat answer to the market-failure problem. Unfortunately, they run into the more fundamental problem of income distribution and property rights. If governments create emissions rights and auction them, they create public property out of a resource (the atmosphere) that was previously available for use (and misuse) free of charge. The same is true when a carbon tax is proposed.

Whether property rights are created explicitly, as in the Coase approach, or implicitly, through the carbon taxes advocated by Pigou, there will be losers as well as gainers from the resulting change in the distribution of property rights and, therefore, market income. Not surprisingly, those potential losers have resisted market-based policies of pollution control.

The strongest resistance arises when businesses that have previously dumped their waste into airways and waterways free of charge are forced to bear the opportunity costs of their actions by paying taxes or purchasing emissions rights. Such businesses can call on an array of lobbyists, think tanks and friendly politicians to defend their interests.

Faced with these difficulties, governments have often fallen back on simpler options such as regulations and ad hoc interventions, such as feed-in tariffs and renewable-energy targets. These solutions are more costly and frequently more regressive, not least as the size of the cost burden and the way it is distributed is obscure and hard to understand. Yet the likely costs of climate change are so great that even second-best solutions such as direct regulation are preferable to doing nothing; and the delays caused by resistance from business, and from the ideologically driven science deniers in their pay, have been such that, in the short run, emergency interventions will be required.

Still, the need to respond to climate change is not going away any time soon, and the costs of regulatory solutions will continue to mount. If we are to stabilise the global climate without hampering efforts to end the scourge of global poverty, some form of carbon pricing is essential.

Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly by John Quiggin is forthcoming via Princeton University Press.Aeon counter – do not remove

John Quiggin is the President’s Senior Fellow in Economics at the University of Queensland in Brisbane, Australia. His previous book, Zombie Economics: How Dead Ideas Still Walk among Us (Princeton), has been translated into eight languages. He has written for the New York Times and the Economist, among other publications, and is a frequent blogger for Crooked Timber and on his own website: www.johnquiggin.com. Twitter @JohnQuiggin

This article was originally published at Aeon and has been republished under Creative Commons.

Walter Mattli on Darkness by Design: The Hidden Power in Global Capital Markets

MattliCapital markets have undergone a dramatic transformation in the past two decades. Algorithmic high-speed supercomputing has replaced traditional floor trading and human market makers, while centralized exchanges that once ensured fairness and transparency have fragmented into a dizzying array of competing exchanges and trading platforms. Darkness by Design exposes the unseen perils of market fragmentation and “dark” markets, some of which are deliberately designed to enable the transfer of wealth from the weak to the powerful. Essential reading for anyone with money in the stock market, Darkness by Design challenges the conventional view of markets and reveals the troubling implications of unchecked market power for the health of the global economy and society as a whole.

How did you come to write this book?

Right after the 2007-2008 financial crisis I became interested in questions regarding the regulation of big banks in order to prevent abuse, market distortions, and further scandals and crises. I wanted to look at the ways in which the very same contributors to the financial crisis benefited from it, but I discovered that a number of financial experts were already examining the topic and producing very insightful research. I thus decided to shift my attention to an important related area that many knew little about: the structure and governance of capital markets. After talking to several dozen market actors and doing some preliminary research, what struck me as particularly interesting was the puzzling transformation of equity market structure: the move from centralized to fragmented markets in the early 2000s. I wasn’t convinced by the conventional view of this transformation; I therefore began to investigate the question of market structure and governance more carefully. In the process, I made interesting discoveries that I felt should be explored more fully and presented to a broad audience.

Can you explain the title? What exactly is being hidden?

A retired regulator with a distinguished 15-year record at the helm of two major financial regulatory organizations confessed to me that he no longer understands how these complex capital markets really work. The average investor is even more in the dark about these markets. When an investor sends an order to buy or sell a stock by the click of a mouse, the order may take a lightning journey through a maze of dark pools and exchanges before being filled. How does the investor know that on the journey to execution the order was treated fairly and was filled at the best available price?

The title, Darkness By Design, refers to almost invisible exploitative trading schemes or arrangements in today’s capital markets that are deliberately designed and governed to enable the transfer of wealth from the weak to the powerful.  

To understand the mechanism of such exploitation, it is important to go beyond conventional accounts of how markets work and acknowledge the extent to which markets are political organizations. What the many conventional accounts of the function of markets overlook is the extent to which markets are deeply political organizations or governance systems where what is being hidden is the extent to which power politics shapes markets. Contending groups intensely battle to shape market rules and structure according to their own narrow preferences. Power is central to explaining markets both in the sense of general power politics arguments about who wins or loses, and in the sense that markets themselves are political institutions governed by power relations.

What are the origins of the market fragmentation that we’re seeing today? 

It’s worth recalling that for over two centuries, securities markets in all major countries tended toward greater concentration. Concentration of trading in one large organized public market or trading “pool” seemed natural and inevitable, because the greater the number of users of an exchange the more attractive that exchange is to new or potential users, since new buyers and sellers are more likely to find a counter-party in a large market than in a small one. That is to say, a central market naturally has the highest concentration of orders: it has the greatest trading depth (volume of bids and offers) as well as breadth (range of tradeable securities). In other words, it has the highest liquidity, and liquidity begets liquidity: the bigger the flow of trades, the stronger the pull.

My book questions the conventional view of the move from centralization to fragmentation that says that centralized markets were monopolistic and inefficient and that this led to the fragmentation of the market. In this narrative, investors are the principal beneficiaries owing to narrower trading spreads and lower commissions, but this deeply entrenched conventional view is flawed. A key finding of my book is that power politics caused the market fragmentation—it was a plot by a coterie of powerful insiders who had grown weary of the traditional way of organizing trading, viewed the old model increasingly as contrary to their economic interests, and quietly pushed for a different market structure more aligned with those interests.

How is market fragmentation hurting us now?

In today’s fragmented markets characterized by many “shallow” pools of liquidity—a proliferation of public exchanges, broker-dealer dark pools, and other private off-exchange trading places—costly new technology is often used by powerful market operators in quiet and nearly invisible ways to maximize their profits at the expense of ordinary investors. Specifically, information asymmetries and secrecy—often deliberate governance-design strategies—have enabled a small but powerful group of unscrupulous market operators to milk conflicts of interest, often in undisclosed or hidden ways, at the expense of the unsuspecting investing public.

Latent in the minds of many victims of these strategies is a belief that “modern” markets are technologically determined and that technological progress must be good. But new technology is neither bad nor good; its social value is solely determined by the incentives or motives of the users of this technology. The rise of fragmentation, or market transformation more generally, matters because it shapes the incentives of market actors to invest in either good or bad governance.

Good governance is about managing conflicts of interest for the long-term benefit of all in society whereas bad governance milks the conflicts of interest for the benefit of the few on the backs of the many. Over the past decade and a half, fragmentation has given rise to bad governance. Market makers have fewer obligations, market surveillance is neglected or impossible, and enforcement is rendered ineffective.

It is important to note that market fragmentation is by no means limited to the US equity market. Elsewhere, too, market centralization has been replaced by varying levels of fragmentation.

Is this story all doom and gloom? Are there any positives? What would have to happen to address the issues related to market fragmentation?

Darkness by design is not inevitable—the mantle of darkness can be lifted through a combination of steps based on several fundamental principles, including market transparency based on stringent disclosure rules and robust market intelligence, a level playing field for market participants, proper accountability for market disruption and bad governance, and, crucially, market consolidation or centralization. The reason is that dominant exchanges in such market systems have particularly strong reputational concerns and the requisite financial resources to invest in good governance. Dominance means high public visibility, which brings with it great reputational vulnerabilities.

In highly fragmented market systems, the many market organizations have an incentive to cut corners. Why focus on delivering high quality public goods, such as price discovery, if competitors can simply free ride, and, in addition, good money can be made by milking conflicts of interest? Once such behavior becomes permissive and the unspoken norm, no significant reputational costs result from engaging in, abetting, or condoning bad market behavior.

Regulatory intervention in capital markets by governments plays a role in lifting the mantle of darkness. However, it is rarely the only answer and not necessarily the most effective one. It is bound to face considerable practical and especially political challenges, not least from powerful defenders of the status quo who will fight change tooth and nail. There is another answer: market solutions to market failures, sometimes nudged or facilitated by regulators. Specifically, greater consolidation and market centralization are possible—not through regulatory intervention but perhaps through market processes.

Consolidation of markets at the national or transnational level, with one or more dominant exchanges, is likely to generate a fairer, simpler, more transparent, and more efficient marketplace than the one created by a fragmented system and characterized by shallow liquidity scattered across a wide range of exchanges, dark pools, and internalizers. 

What do you hope readers will take away from reading this book?

A key contribution of this book is the empirical analysis into historical patterns of market structure and governance. The book shows the market transformation that took place over time. Central to the analysis is the role of power politics in shaping market structure and governance: changes in the distribution of power in capital markets alter market actors’ relative influence in pushing for or opposing change. Specifically, over the last decade and a half, transformations have taken place which have resulted in fragmentation and badly governed markets, thereby adversely affecting aspects of quality and fairness in these markets. I hope the book will encourage readers to become more cautious and will equip them to ask tough questions of their brokers in order to better protect their interests when investing in capital markets.

Walter Mattli is professor of international political economy and a fellow of St. John’s College, University of Oxford. His books include The New Global Rulers: The Privatization of Regulation in the World Economy and The Politics of Global Regulation. He lives in Oxford, England.

J. C. Sharman on Empires of the Weak

SharmanWhat accounts for the rise of the state, the creation of the first global system, and the dominance of the West? The conventional answer asserts that superior technology, tactics, and institutions forged by Darwinian military competition gave Europeans a decisive advantage in war over other civilizations from 1500 onward. In contrast, Empires of the Weak argues that Europeans actually had no general military superiority in the early modern era. J. C. Sharman shows instead that European expansion from the late fifteenth to the late eighteenth centuries is better explained by deference to strong Asian and African polities, disease in the Americas, and maritime supremacy earned by default because local land-oriented polities were largely indifferent to war and trade at sea. Bringing a revisionist perspective to the idea that Europe ruled the world due to military dominance, this book demonstrates that the rise of the West was an exception in the prevailing world order.

Scholars have long argued that the dominance of the West can be attributed to superior technology, tactics, and institutions. Your book takes an opposing view. Can you describe it?

The standard view is to see Western expansion as synonymous with Western dominance, but my book separates the two. For around three centuries, Western expansion was more often the result of deference and subordination to non-Western rulers. Africans and Asians tolerated a weak European presence because Europeans were generally fixated on the control of the seas, which more powerful but terrestrially-oriented non-Western rulers generally didn’t care about. Even in the Americas, European victories were much more partial and incomplete than often portrayed, and were generally the result of disease and demography rather than superior technology, tactics and institutions.

What accounts for the narrative that the West came to power through general superiority?

The conventional ‘military revolution’ thesis argues that Western expansion reflected superior technology and institutions, basically guns and states. Supposedly, these advantages were first developed in the fiercely competitive environment of European warfare, and then applied to conquer the rest of the world. I argue this thesis is wrong, for several reasons, but particularly because of a reading of history which starts at ‘the end’ of the story, i.e. Western superiority, and then views the historical record from this supposed end-point. So European victories get a lot of coverage, because Europeans won in the end, whereas the Ottoman, Mughal and successive Chinese empires, which were much more powerful than their European counterparts for most of their existence, can be written off, because these empires lost in the end. But of course everyone loses in the end. The Europeans lost their empires, and someday the United States will lose too. Interestingly, even post-colonial scholars and those most critical of European imperialism tend to play into the narrative of powerful Westerners dominating everyone else. 

If the dominance of the West is an aberration to the prevailing global international system, what does a typical system look like?

Very roughly we can say that we’ve had some sort of global international system for five centuries. In most of Africa and Asia, Europeans weren’t really dominant until the nineteenth century (and this didn’t last long). In the three hundred years before, the typical arrangement was for Westerners to interact with Asian and African polities on a basis of inferiority. But because culture, ideas, and legitimacy are so important for shaping the international system, it’s hard to say what a typical form is.

For example, in the late nineteenth century the consensus was that any great power worthy of the name had to have an empire, and so we had an international system of empires, even though most empires lost money and didn’t confer security benefits. Then in a huge change that social scientists spend far too little time thinking about, empires went out of fashion. Now we have an international system of formally equal states, even though most states are pretty hopeless at performing the functions that are meant to justify their existence.

What led you to write this book?

The first reason was historical: that there was this hugely important undiscovered early modern international system out there, or at least a neglected and misunderstood international system, waiting to be explored. To me what makes international politics in the period 1500-1800 so exciting is that it upends our presumptions of superior, more powerful Westerners dominating everybody else. Sometimes this happened, but for two to three centuries Westerners were more likely to be dominated by non-Westerners, including in Europe.

The second reason was a basic rejection of the standard functionalist presumption that on average organizations work well, i.e. efficiently and effectively, because of learning and competition. On the contrary, I think getting the job done efficiently has very little to do with how organizations are structured and how they work.

For example, it’s fairly uncontroversial to say that most meetings in universities, corporations, and government bureaucracies are a waste of time (and hence money). But people can simultaneously know this, while continuing to go to and schedule endless meetings, without any plans to change this situation. Organizations, including militaries and states, do not learn to become more efficient, and are not penalized for their inefficiency. In environments of overwhelming complexity, they mainly stick to ritualized ways of doing things, like going to meetings.

What does the book have to say about international politics today and in the future?

Historians have done an excellent job of showing how the way we think about the past affects our views of the present and the future, and this point certainly applies to international politics. All sorts of things we currently tend to take for granted about international politics are in fact strange, while some important things we tend to think of as strange, and perhaps worrying, are actually the historical norm. The fact that all the world’s polities are today organized as one homogenous type of unit, the sovereign state, is very unusual by historical standards. Looking to the future, if China or other non-Western states were to become the most powerful in the twenty-first century (and social scientists are lousy at predictions so I have no idea if this will happen), rather than being unprecedented, this would in fact be a return to the historical norm in international politics.

J. C. Sharman is the Sir Patrick Sheehy Professor of International Relations in the Department of Politics and International Studies at the University of Cambridge and a fellow of King’s College. His books include The Despot’s Guide to Wealth Management and International Order in Diversity. He lives in London.

Francesca Trivellato on The Promise and Peril of Credit

The Promise and Peril of Credit takes an incisive look at pivotal episodes in the West’s centuries-long struggle to define the place of private finance in the social and political order. It does so through the lens of a persistent legend about Jews and money that reflected the anxieties surrounding the rise of impersonal credit markets.

What are the promises and the perils of credit?

This is a book about the distant past, but to understand its import, we may think about the fallout of the 2008 financial crisis. After the collapse of Lehman Brothers and the foreclosure crisis, a few radical voices called for an end to capitalism. But most people, in one way or another, demanded a fairer capitalism in which Main Street gains as much as Wall Street, and in which ever more intricate financial instruments provide for all and not just for savvy and well-connected insiders. The problem is that we cannot agree on what constitutes fair capitalism. Variations of this ideological and regulatory struggle have existed in Europe since the year 1000, when the Commercial Revolution of the Middle Ages set in motion the first sustained period of demographic and economic expansion on the continent after the fall of the Roman empire. The more people participated in market exchanges, the more difficult it became to distinguish reliable from bad borrowers, trustworthy from shady bankers.

What is the legend that the books uncovers?

The legend tells the story of Jews fleeing the kingdom of France sometime between the seventh and the fourteenth centuries who invented marine insurance and bills of exchange in order to salvage whatever they could of their assets. The legend is false: Jews did not invent marine insurance and bills of exchange, though they were chased from France multiple times during the Middle Ages and every expulsion was accompanied by confiscation of goods. The first rendition of the legend appeared in print in 1647 in a collection of maritime laws.

What are bills of exchange?

Marine insurance at the time worked in the same way as modern insurance works, but bills of exchange are no longer in use. They were at once a credit instrument and a way of transmitting money abroad in a foreign currency. Picture MoneyGram meets a personal check. Materially, they were slips of papers even smaller than a modern check, scribbled in code (details can be gleaned on the book cover). Bills of exchange allowed merchants to transfer funds rather than risk the theft or the loss at sea of their silver coins. In the hands of the most experienced merchants, they were used to conduct complex speculative financial transactions that were entirely divorced from the purchase and sale of material goods. Bills of exchange symbolized all that was abstract, intangible, arcane, helpful but also potentially dangerous in the growing credit economy of early modern Europe. They were the derivatives of their time.

Why should we care about the legend that attributed to medieval Jews the invention of bills of exchange?

Because it was a preferred way in which until a hundred years ago writers discussed a question that is central to the history of the West: how can we expand the number and range of people who enter the marketplace but control their good behavior? The impersonality of the market is both appealing and threatening. Before and after Adam Smith, the invisible hand was only one of the idealized solutions to the problem of oligopolies. Many writers resorted to Jewish usury as a metaphor to denounce the asymmetries of powers that plagued the market. In this they were assisted by stockpiles of anti-Jewish prejudice images. In its original formulation the legend I discuss adapts this arsenal of anti-Jewish sentiments to denounce the dark forces that could led good Christian borrowers to loose small and large fortunes. Jews were a universal symbol of financial malpractice, to attribute the invention of Europe’s key credit instruments to Jews did not mean that Christians could not put those instruments to good use, but it meant that marine insurance and bills of exchange were tainted by usury as their original sin.

If the legend is as important as you claim, why does no one knows about it?

There are several reasons the legend is forgotten. Bills of exchange have fallen out of use and we have ceased to wonder where they came from. Moreover, economic historians now tend to search for the origins of those financial institutions that have survived into the present, notably the stock market, which developed in 1600 but affected many fewer people than the hundred thousands who handled marine insurance and bills of exchange. There is also a tendency to assume that Jews, both real and imaginary, mattered to European economic thought only in the Middle Ages, before the emergence of a secular “science of commerce” emerged. This is simply not true. Religious language continued to inform most economic writing in the early modern period. To accuse a Christian merchant of being “Jewish” was a way of equating their behavior to that of Jews, who supposedly wished to rob Christians of their wealth.

How did Jews react to the circulation of this legend?

I wish I knew what Jews told each other about a story that some of them surely heard in one version or another. Some Jewish writers did engage with the legend in writing, especially in the nineteenth century. To my knowledge, the first to do so was the father of British prime minister Benjamin Disraeli, who had his children baptized, making his son’s political career possible. In some quarters, the legend was a source of Jewish pride and fed the genre known as Jewish-contributions-to-civilization by touting Jewish financial prowess. Other Jewish authors firmly rejected a legend that they saw as mobilizing insidious stereotypes.

Why don’t you ever mention Shylock in a book about Jews and credit?

Some historians have tried to pin down the sources of Shakespeare’s imagination by establishing whether one Jewish merchant or another living in the Venice ghetto in the 1590s may have served as a model for the great English writer. I regard such efforts as futile: literary imagination is not more or less compelling because it is based on identifiable facts. But if we want to judge one of the masterpieces of Renaissance theater by its empirical validity, then The Merchant of Venice would fail the test. The pound of flesh is only one of the dubious references in the play. Shylock would have lent money to Antonio by means of a bill of exchange. Only poor Christians had to deposit a pledge to borrow a small sum in the ghetto. A patrician like Antonio could borrow by using his reputation as collateral. After 1589, when international Jewish merchants hailing from Iberia found a safe haven in Venice, Antonio would have found Jewish merchants able and willing to issue him a bill of exchange. The figure of Shylock really tells us that the Jewish usurer, one of the most long-lasting figments of the Western imagination, was a protean symbol that encompassed stereotypes of both the parasitic Jewish poor and the rapacious Jewish capitalist.

Francesca Trivellato is professor in the School of Historical Studies at the Institute for Advanced Study in Princeton. She is the author of The Familiarity of Strangers: The Sephardic Diaspora, Livorno, and Cross-Cultural Trade in the Early Modern Period.

Alberto Alesina, Carlo Favero and Francesco Giavazzi on Austerity

AusterityFiscal austerity is hugely controversial. Opponents argue that it can trigger downward growth spirals and become self-defeating. Supporters argue that budget deficits have to be tackled aggressively at all times and at all costs. In this masterful book, three of today’s leading policy experts cut through the political noise to demonstrate that there is not one type of austerity but many. Bringing needed clarity to one of today’s most challenging subjects, Austerity charts a sensible approach based on data analysis rather than ideology.

What is controversial about fiscal austerity?

The term austerity indicates a policy geared toward the sizeable reduction of government deficits and stabilization of government debt achieved by means of spending cuts or tax increases. Discussions about the relative benefits and costs of austerity policies have been toxic, often taking a very ideological, harsh tone. The anti-austerity front argues that austerity is counterproductive: it results in increases—rather than reductions—in the debt-over-GDP ratio since it generates reductions in the denominator of this ratio which more than offset the gains in the numerator. The pro-austerity front emphasizes the impact of expectations and confidence on government debt. Imagine a situation in which an economy is on an unsustainable path with an exploding public debt. Sooner or later a fiscal stabilization has to occur. The longer this is postponed, the higher the taxes that will need to be raised or the spending to be cut in the future. When the stabilization occurs it removes the uncertainty about further delays which would increase the costs of stabilization.

Why did you write this book?

The contentious discussion on the effects of austerity has distracted commentators and policymakers from meaningful discussion on the enormous difference, on average, between expenditure-based and tax-based austerity plans. This book discusses the theory and the evidence needed to better assess the consequences of the different types of austerity. 

What are the differences in the impact of tax-based measures versus expenditure-based measures?

Spending-based austerity plans are remarkably less costly than tax-based plans. Spending-based plans have, on average, a close to zero effect on output and lead to a reduction of the debt over GDP ratio. Tax-based plans have the opposite effect: they cause large and long lasting recessions and do not lead to the stabilization of the debt to GDP ratio. Two recent examples are the consolidations carried out by Ireland and Spain in response to the Eurozone crisis. The Spanish correction, which featured a larger share of tax hikes, markedly slowed the real GDP growth and did not result in a decline in the debt ratio. Contrast that with Ireland, where the spending-based correction had little output costs and led to a sharp decline in debt.

How should we change our thinking about austerity in order to assess its effectiveness properly?

The empirical analysis of the macroeconomic effect of different types of austerity is crucial. To this end one should start from the data. The book documents in detail close to 200 austerity plans carried out in 16 OECD economies from the late 1970s to 2014. To reconstruct these plans we have consulted original documents (some produced by national authorities, and some produced by organizations such as the OECD, the IMF or the European Commission) concerning about 3,500 individual fiscal measures. The second step is the proper modelling of fiscal actions. When legislatures decide to launch a fiscal consolidation program, this rarely consists of isolated shifts in this or that tax, or in this or that spending item; instead, what is adopted is typically a multi-year plan with the objective of reducing the budget deficit by a certain amount every year. To the extent that expectations matter for the planning of consumers and investors, the multi-year nature of a fiscal adjustment, and the announcements that come with it, impact their economic effects. Third, the effect of different plans on the economy should be assessed. We document a sharp difference between adjustment plans based mostly on tax increases and plans based mostly on expenditure reductions. This finding suggests that there is no “austerity” as such: the effects of austerity policies are sharply different depending on the way they are implemented.

In assessing the empirical evidence we needed to overcome three major obstacles.

The first is the so-called “endogeneity” problem, or the interaction between fiscal policy and output growth. Suppose you observe a reduction in the government deficit and an economic boom. It would be highly questionable to conclude that policies that reduced deficits have generated growth, as it could easily be the other way around. We address the endogeneity problem by considering only policy changes not motivated by the state of the business cycle but rather by a desire to reduce deficits.  

Second, once exogenous fiscal adjustments episodes have been identified, then the calculation of their impact on the economy requires the specification of an empirical model. An important tradeoff emerges here: the simpler the model the easier to calculate the multipliers, but the more likely that important relations among variables are missed. We adopt several models in this book to assess the robustness of our empirical results. 

Third, major episodes of austerity often are accompanied by changes in other policies: monetary policy; exchange rate movements; labor market reforms; regulation or deregulation of various product markets; tax reforms; and so on. In addition, austerity is sometimes adopted at times of crisis due to runaway debts, not in periods of business as usual. We assess explicitly the role of accompanying policies in the determination of the impact of austerity to conclude that the heterogenous effects of tax-based and expenditure-based plans does not depend on different accompanying policies.

In cases where austerity has “gone wrong,” what accounted for that? What should have been done differently?

During 2010-11 the collapse of confidence in sovereign European debt and the explosion of interest rates on government bonds in some countries (Italy, Spain, Greece, Portugal) led to a situation that was close to a debt-induced financial crisis. Could the governments of these countries have waited, postponing austerity to when the recession was over? Hard to say. We do not know what would have happened without austerity. What we can say, however, is that even in these cases, namely when austerity policies are implemented during a recession, the differences between the two types of austerity is very relevant: tax-based austerity plans have been much more costly than spending-based plans.

Can you give an example of a government that had the right idea about austerity?

In the 1990s Canada implemented a successful package of large government cuts which, coupled with accommodating monetary policy and structural reforms, was expansionary. In the book we document how since the 1993 elections almost all the contending parties accepted the need for such a reduction in government debt and deficit. In 2010, the Coalition government led by David Cameron in the UK responded to unsustainable and growing deficits with a program of large budget cuts. After this correction, the UK economy grew at respectable rates compared to the other major economies and proved the IMF predictions of a major recession wrong. Finally, and maybe most interestingly, the Irish government in its December 2009 Stability Programme Update was clear in acknowledging the unsuccessful effects of tax-based austerity. This in turn justified the adoption of a package of significant expenditure cuts.

What do you hope readers will take away from this book?

Talking about “austerity” without defining how austerity is implemented does not make any sense. The composition of austerity plans is crucial to understanding their effects on growth and fiscal sustainability. The data on 16 OECD countries over the period 1978-2014 show that a spending reduction plan and tax-based plans of the same dimension have different effects on growth. Tax-based plans lead to deep and prolonged recessions, lasting several years. Expenditure-based plans on average exhaust their very mild recessionary effect within two years after a plan is introduced. The component of aggregate demand which mostly drives the heterogeneity between tax-based and expenditure-based austerity is private investment. The effects of fiscal plans on the debt to GDP ratio depend on the initial level of the debt. In the high-debt high-cost of debt scenario, an expenditure-based plan has a stabilizing effect on the debt dynamics while a tax-based plan has a destabilizing effect; in a low-debt low-cost scenario the expenditure-based adjustment remains stabilizing, while the effect of a tax-based plan becomes neutral. The main goal of our work is to explain the evidence and the theory which underlies these results. To this end we discuss the theory; we construct a new data set; we propose to analyze fiscal plans to take the empirical modelling of fiscal policy closer to the real-life process of its implementation; and we consider case-studies and econometric evidence. We also study the role of accompanying policies: devaluations, monetary policy and structural reforms in the goods and labor markets. We devote special attention to the recent round of austerity plans implemented after the financial and Eurozone crises. Finally, we ask the political economy question of whether austerity is the kiss of death for the governments that implement it, concluding that the answer is much less obvious than the popular debate would seem to suggest.

Alberto Alesina is the Nathaniel Ropes Professor of Political Economy at Harvard University. He is the author, with Francesco Giavazzi, of The Future of Europe: Reform or DeclineCarlo Favero is the Deutsche Bank Chair in Quantitative Finance and Asset Pricing at Bocconi University in Italy. He is the author of Applied MacroeconometricsFrancesco Giavazzi is professor of economics at Bocconi University.

William L. Silber on The Story of Silver

SilberThis is the story of silver’s transformation from soft money during the nineteenth century to hard asset today, and how manipulations of the white metal by American president Franklin D. Roosevelt during the 1930s and by the richest man in the world, Texas oil baron Nelson Bunker Hunt, during the 1970s altered the course of American and world history. The Story of Silver explains how powerful figures, up to and including Warren Buffett, have come under silver’s thrall, and how its history guides economic and political decisions in the twenty-first century.

Why did you write this book?

In 2014 Bunker Hunt died and when I told my children – who had worked in finance all their lives—they thought Bunker was one of the guys who kept hitting the ball into the sand in my Sunday golf group. Right then I knew that I had to write this book to at least tell the story of the greatest commodities market manipulation of the 20th century – one that was perpetrated by the larger than life Nelson Bunker Hunt – the richest man in the world who ultimately went bankrupt trying to corner the silver market with his brothers, Herbert and Lamar, in the 1970s. The Hunts drove the price of silver to a record $50 an ounce in January 1980 and nearly brought down the financial markets in the process. But the Hunt brothers were not the first nor the last to be seduced by the white metal. In 1997 Warren Buffett, perhaps the most successful investor of the past fifty years, bought more than 100 million ounces, almost as much as the Hunts, and pushed the price of silver to a ten-year peak. In 1933 Franklin Delano Roosevelt raised the price for silver at the U.S. Treasury to mollify senators from western mining states while ignoring the help it gave Japan in subjugating China. Was FDR’s price manipulation in the 1930s less criminal than Nelson Bunker Hunt’s in the 1970s? Reading this book will let you make an informed judgment and it will also show that the white metal has been part of the country’s political system since the founding of the Republic. Perhaps the most famous speech in American electoral politics, Nebraska Congressman William Jennings Bryan’s “Cross of Gold” sermon at the 1896 Democratic convention, was all about silver. Bryan’s cause, the resurrection of silver as a monetary metal, aimed to rectify the injustice perpetrated by Congress in the Crime of 1873, which discontinued the coinage of silver dollars that Alexander Hamilton had recommended in 1791. Thus, the Story of Silver spans two centuries and is woven into the fabric of history like the stars and stripes.   

Why did Bunker Hunt become obsessed with silver in the 1970s?    

A member of the right-wing John Birch Society, Bunker became the richest man in the world at age forty in 1966 when oil was discovered in Libya where he owned the drilling rights. His ultraconservative politics made him distrust government and its paper currency and favor real investments, such as oil, land, and racehorses. The Arab oil embargo in 1973 provoked an outburst of inflation and Libya’s Muammar Qaddafi nationalized Bunker’s oil fields, forcing the Texan into precious metals to protect against the declining value of the dollar. He bought silver, rather than gold, because he thought the yellow metal was “too political” and “too easily manipulated” by outside forces. Bunker worried that central bankers could sell their massive gold reserves and depress its price. Silver, on the other hand, benefited from favorable fundamentals: the demand for the white metal by industry, for use in electronics, photography, and medicine, exceeded mine production by nearly 200 million ounces a year (Warren Buffett invested in silver in 1997 for the same reason). Moreover, in 1973 the price of silver was cheap relative to gold. The price ratio of gold to silver had been about 16 to 1 for a century before the Crime of 1873, meaning that it took 16 ounces of silver to buy an ounce of gold. In 1973, before Bunker began his accumulation, the price ratio was almost 40 to 1. Bunker thought silver’s industrial uses should have boosted its price to where only 5 ounces of silver were needed to get an ounce of gold. Bunker picked 5 to 1 because it was lower than 16 to 1 but he could have gone further. In ancient Egypt silver’s scarcity and medicinal uses had made it more valuable than gold.   

Did the Hunt Brothers really manipulate the price of silver?

The Commodity Futures Trading Commission (CFTC) argued that during the second half of 1979, the Hunt brothers and their Arab collaborators coordinated a scheme to drive up silver prices in the futures markets by purchasing over 200 million ounces of the white metal, more than the combined annual output of Canada, Mexico, Peru, and the United States, the four largest noncommunist producing countries. They pressured the market by controlling more than 40% of silver in exchange warehouses and by taking delivery of almost 50 million ounces of bullion. But the alleged manipulation was not the classic corner of futures markets, where the longs prevented the shorts from delivering. As silver prices accelerated in December 1979, for example, even the CFTC said that the shorts “anticipated no difficulties in making delivery on their positions.” Moreover, the Hunts denied manipulative intent, dismissed any coordination, even among themselves, and justified their demand for silver as a hard asset to protect against global risks in the second half of 1979, when inflation reached double digit levels, Iranian terrorists invaded the United States embassy in Teheran and seized American hostages, and when the Russians invaded Afghanistan.  Disentangling the impact of the alleged manipulators from legitimate speculation took extensive litigation in this case. In a civil trial in 1988 a jury easily concluded that the Hunts conspired with others to manipulate but disagreed about the impact on prices. The jury had to distinguish between the defendants’ accumulation and the unsettling news of 1979. The CFTC argued that gold prices reflect political and economic turmoil and silver increased twice as much during 1979, providing a benchmark for damage calculation for the jury. But that ignores the historical evidence that the white metal is normally twice as volatile as the yellow. For example, during the European debt crisis following Lehman’s bankruptcy in 2008, silver rose 400% and gold increased by 250% and none of that disparity came from manipulation. That evidence came too late to exonerate the Hunts.  

How did FDR’s silver subsidy help Japan subjugate China in the 1930s?

During the Great Depression, after the price of silver hit a record low of 24¢ an ounce, Democratic Senator Key Pittman of Nevada, the powerful chairman of the Senate Foreign Relations Committee, urged President Roosevelt to reverse the Crime of 1873 and restore the white metal’s full monetary status. In exchange, Pittman promised the support of fourteen senators from western mining states for Roosevelt’s controversial New Deal legislation. FDR agreed and responded with a series of purchase programs for silver by the U.S. Treasury that ultimately doubled the price of the white metal. The higher price attracted silver from the rest of the world, especially from China, whose currency was backed by the precious metal, and ultimately forced China to abandon the silver standard when that country was most vulnerable. It was 1935 and China, led by American ally Chiang Kai-shek, faced an internal threat from Mao Tse-tung’s communist insurgents and an external threat from Imperial Japan. Roosevelt’s Treasury secretary, Henry Morgenthau, worried that China’s insecure government, weak economy, and susceptibility to Japanese aggression made her especially vulnerable to the dislocations arising from American silver policy. Morgenthau was right to worry. Roosevelt’s pro-silver program to please western senators helped the Japanese military subjugate a weakened China and boosted Japan’s march towards World War II, demonstrating the danger of formulating domestic policy without considering international consequences.  It is a cautionary lesson for putting America First today, especially since the fallout from such narrow-minded policymaking may not materialize until it is too late, just like in the 1930s.

Was the Crime of 1873 really a crime?

The Crime of 1873 refers to legislation passed by Congress on February 12, 1873, negating Alexander Hamilton’s favorite law, that both gold and silver be monetary standards in the United States, and establishing gold as sole legal tender for all obligations. The new law omitted the free and unlimited coinage of silver dollars at the mint, an option since 1792, and restricted the legal tender status of subsidiary silver coins, such as dimes, quarters, and half-dollars, to five dollars or less. The U.S. Constitution allows Congress to “coin money” and “regulate the value thereof,” so no legislator voting for the act technically committed a crime. The allegations of impropriety arose because few people realized the full consequences of the shift to gold when the law was passed. Moreover, Senate Finance Committee Chairman John Sherman, who introduced the legislation, not only failed to sound the warning bell but also soft-pedaled the bill despite knowing its importance. Sherman’s removal of the silver dollar from the Coinage Act of 1873 eroded the value of the white metal, cutting its price in half by the mid-1890s, and altering the course of American history. Twenty-five years of price deflation during the last quarter of the 19th century increased the burden of debts like mortgages which remained fixed in dollar terms even though home prices declined. The drop in wages and agricultural prices launched a generation of social combat, pitting “silverites” against “goldbugs,” debtors versus creditors, and midwestern farmers against East Coast bankers, all combining to darken the political landscape like a dust storm. Many consider L. Frank Baum’s children’s story, The Wonderful Wizard of Oz, which has entertained millions since it was published in 1900, an allegory of the contemporary class warfare. William Jennings Bryan capitalized on the social upheaval, captured the Democratic nomination for the presidency in the 1896 election with his Cross of Gold speech promoting the monetary status of silver and easier credit. Bryan lost to William McKinley, leaving silver a second class monetary metal until Key Pittman and Franklin Roosevelt joined forces to rescue the white metal in the 1930s.  

Should investors own silver today?

The worldwide experiment in fiat currency, pure paper money, that began on August 15, 1971, when President Nixon suspended the right of foreign central banks to convert dollars into gold, almost failed at the start. The newly designed freedom from precious metals allowed America’s central bank, the Federal Reserve System, to deliver easy credit in response to political pressure, spawning the Great Inflation of the 1970s and nearly destroying the U.S. dollar. But the chaos unleashed popular support for making price stability the primary objective of an independent central bank. Since then, central bank independence throughout the world has replaced gold and silver as guardian of the currency. And if central bankers do their job that arrangement will continue, but public support can evaporate, undermining banker resolve. The U.S. Congress, for example, can abolish the Federal Reserve with a simple majority vote, suggesting that America’s central bank might run a printing press when rising interest rates bring an avalanche of protest to Capitol Hill. The Federal Reserve has survived the fifty-year trial of fiat currency, but that period is less than a heartbeat in world history. The Soviet Union’s experiment with communism challenged America for world domination for the better part of the twentieth century before expiring like the worthless paper currency of Germany’s Weimer Republic. Central bankers remain on trial, and the uncertain verdict sustains the ancient role of gold and silver as storehouses of value in the new millennium.

William L. Silber is the Marcus Nadler Professor of Finance and Economics at New York University’s Stern School of Business. His many books include When Washington Shut Down Wall Street (Princeton) and Volcker (Bloomsbury). He lives in Teaneck, New Jersey.

Matthias Doepke and Fabrizio Zilibotti on Love, Money, and Parenting

Doepke & ZilibottiParents everywhere want their children to be happy and do well. Yet how parents seek to achieve this ambition varies enormously. For instance, American and Chinese parents are increasingly authoritative and authoritarian, whereas Scandinavian parents tend to be more permissive. Why? Love, Money, and Parenting investigates how economic forces and growing inequality shape how parents raise their children. From medieval times to the present, and from the United States, the United Kingdom, Germany, Italy, Spain, and Sweden to China and Japan, Matthias Doepke and Fabrizio Zilibotti look at how economic incentives and constraints—such as money, knowledge, and time—influence parenting practices and what is considered good parenting in different countries. Love, Money, and Parenting presents an engrossing look at the economics of the family in the modern world.

What led you to write this book?

Everything started when we realized that two of our experiences had crossed paths: as researchers and as parents. As economists we have always been interested in inequality and human capital formation. Our work studies how the economy influences the transmission of values, preferences, and skills within families. The way in which parents interact with their children is a focal point of our recent research.

We have dealt with the same issues in our own families. We grew up in Italy and Germany, but our academic careers have brought us to live in several other countries. Fabrizio’s daughter was born in Stockholm, and has lived in Sweden, the UK, Italy, and Switzerland. Her parents are now in the US and she often visits Spain (her mother is Spanish). Matthias had his three sons in the US, but his family spends a lot of time in Germany and currently lives in Spain. We both have also frequent contacts with East Asian cultures, especially China and Japan.

We have been struck by the differences in parenting practices across countries and over time, such as the contrast between the liberal parenting that we experienced as children in Europe compared to the high-pressure parenting culture in the US today. At some point, we realized that the differences we observed in our own lives line up well with broader patterns in the data for many countries and time periods, and that all of this variation conforms surprisingly well with the predictions of our own economic theories. So, we decided to focus on parenting through the double lens of parents and social scientists. Having published most of our earlier work in academic journals that only few experts read, we felt the urge to communicate our findings and ideas to a larger public. We believe we have something novel to tell to parents and general readers.

How do you account for the difference in parenting between European, American and Chinese parents as exemplified in books like Battle Hymn of the Tiger Mother?

We love Amy Chua’s book. It is fun to read, well-written, full of self-irony—we recommend it. But our book takes a different tack. We do not believe that the main explanation for differences in parenting styles is limited to cultural factors. For instance, we do not think that Chinese parents are different just because they are Chinese or because of the Confucian heritage. Rather, we think that parents in different parts of the world behave differently because they respond to different economic incentives.

In today’s China, children grow up under enormous pressure to achieve at the highest level in academics. Grades determine which university they can attend, and Chinese universities vary widely in quality of education. Making it into Peking University or Tsinghua or Fudan is a ticket to a brilliant future. For those who fail, life can instead be tough. The US is less extreme, but also has large quality differences across schools and high income inequality. In both countries, parents emphasize the importance of children working hard and becoming achievers; even more so in China than in the US, because getting good grades and doing well in exams is even more important in China.

European countries (especially Scandinavian countries) are in comparison much less unequal. There, parents can afford to be more relaxed and let their children discover the world at their own speed and according to their own inclination. Excelling at school is less important; there are many second opportunities to do well in life, and safety nets are more robust. It is interesting to observe that parents in Japan (a country that has closer historical and cultural ties with China than with Western Europe) report some parenting values that are similar to those of parents in the Netherlands. What do the Dutch and the Japanese have in common? Culturally, very little, but they both have low income inequality. Amy Chua also emphasizes that the experience of being an immigrant has an impact on parenting. In our view, there are good economic reasons for that. Immigrants typically lack strong local connections that can help with getting ahead. So, school achievement is the best strategy for success.

Does your research lead you to draw value judgments on certain kinds of parenting over others? Or is it more the case that the type of parenting that is directly related to economic conditions is best suited to those very conditions?

We stay away from value judgments. Our book does not tell parents that a particular parenting style is better than another. This sets our book apart from many existing parenting guides, where experts try to teach “good parenting.” Experts often disagree, and so the market offers titles for any taste; there are books praising achievement-oriented (authoritative, as we call it) parenting, and other books that make the case for “free-range” (permissive) parenting. In contrast, we take the view that parents, by and large, know what they are doing. And so we don’t come out of the ivory tower to teach a more enlightened way to be a parent.

Our goal is to explain how parents respond to the environment in which they and their children live. Going back to China, the Chinese parenting style is an adaptation to the incentives of that society. Parents push their children hard, because this is what it takes to do well in China. Switching to free-range parenting might be a bad idea for them. Conversely, helicopter parenting would not work well in Scandinavia. That society rewards independence and teamwork; rampant individualism is not viewed as an asset and is not even especially appreciated by employers.

To be clear, we are not saying that parents around the world sit down and consider the different options and tradeoffs with scientific precision. They just try to do what feels right to them, but exactly what this means inevitably depends on the economic environment. Many of these mechanisms are subconscious and become part of what we informally call the local culture or parenting norms. These norms change over time and adapt to evolving economic conditions, something we document in detail in the book. When we were children in the 1970s, inequality was far lower, and our parents were much more relaxed about our upbringing. With our own children, we have adopted a more intensive, achievement-oriented parenting style, and certainly not because we are better parents. Rather, because the economic conditions have changed.

How do money, knowledge, and time come together to influence parenting?

The first word in the title of the book is ‘love,’ because we believe love to be the main motive of parenting. First and foremost, parents want their children to be happy in life. This premise is important to understand our book, especially because people often perceive economists as being fixated on a restricted set of financial objectives. Having said that, we do believe that money matters for a happy life. This is not our bias: dozens of empirical studies on subjective well-being point at a strong correlation between economic success and self-reported happiness.  Our argument is that when inequality is low, economic success is less salient in parenting, because stakes are lower. In contrast, in more unequal societies, parents become more concerned with how their children do economically. Being a mediocre artist may be sad on its own, but it is much worse in a society without safety nets where professional failure can lead to poverty and social exclusion. At the same time, if nobody tries, no talented artist will ever emerge.

Knowledge (or education) matters too, for two reasons. First, it is a vehicle to economic and social success—so parents typically push their children to do well in school. Second, education is an asset for parents; it sharpens their tools to influence and motivate their children. This might explain why we observe that less educated parents are more often authoritarian and prone to punish their children rather than to motivate them. Time is a crucial ingredient because much of parenting is about interacting directly with the child. But time and money are not independent; for example, richer parents often pay other people for doing basic housework tasks (such as cleaning) to make room for “quality time” with their children. Others do not have the same luxury.

Is it possible to track changes in permissiveness in parents over decades and see that those changes correlate with economic forces?

Let us first clarify that we use the term ‘permissive’ without any negative connotation. We do not mean ‘indulgent’ or, worse, ‘disengaged.’ We could as well label this style liberal or even free-range parenting (We borrow the term ‘permissive’ from child psychology literature). With this clarification in mind, we see that parents were much more permissive in the 1960s and 1970s than they are today. They were altogether less obsessed with supervising and guiding their children, and spent many fewer hours per week (as we see from time diaries) interacting with them. American parents half a century ago were more similar to the Swedish parents of today than to the frantic generation of American helicopter parents of the 21st century. Why? Fifty years ago inequality reached a historical trough. In a more equal society, there was less of a need to push children hard.

Another interesting observation is that the permissive mood of the 1960s came together with the rejection of the authoritarian methods that had been prevalent for centuries both at home and in school. We argue that this is due to the combination of declining inequality and increasing social mobility. Until the early 20th century, a large proportion of families lived in rural areas, and many children inherited their parents’ occupation and position in society. Most learning and education took place within the family, and the past, present, and future looked very much alike. In this society, parents perceived it as their duty to guide their children, forcing them if necessary, in their own footsteps, pretty much in the fashion as their own parents had done with them.

Since then, society has changed. Children learn most of what is useful for their future professional activity in schools, where parents cannot easily monitor their effort. Parents must then motivate their children. In addition, technological change has increased occupational mobility and caused old jobs to disappear and new jobs to take their place. Being like your father or your mother is often not an option. The old-style traditional parenting has then lost its appeal. Now, children must make independent choices and the best parents can do is shape their attitudes.

How do more financially privileged parents respond to the same economic forces differently from less privileged parents?

Both economic incentives and constraints matter. The rug rat race, namely the competition among frenetic parents in fostering their children’s success, imposes growing demands on families. Only some of them can live up to the daunting task. Driving children from music class to sports to an art exhibition requires lot of time and money. Many families cannot afford it. Take a single mother living in a disadvantaged area. She will have neither the time nor the financial resources to offer her children such luxuries. Moreover, her children will be around other children who suffer the same relative deprivation.

What’s worse, neighborhoods have become increasingly socially segregated. The result is that a large share of the population is excluded from the race. Helicopter parenting is the root of what we call a growing “parenting gap.” A gap between rich and poor families has of course always existed but it has been exacerbated by the intense overparenting of the upper middle class.

Blaming middle-class parents for overparenting is futile; they are simply responding to changing economic incentives. They try to be good parents in the competitive society in which their children live. This is why in the book we advocate policy interventions aimed at changing incentives and equalizing opportunities. We also discuss how the parenting gap can turn into a parenting trap, whereby disadvantaged families simply give up, and their children face ever-growing barriers to get out of poverty. This may be a channel behind the recent decline in social mobility in the lower echelons of society.   

What do you hope readers will take away from this book?

We are often asked which parenting style is the best. On that, we are happy to share our subjective experiences and beliefs as parents, but as social scientists we cannot give any definite answer. However, when it comes to the society as a whole, we are more assertive. We think that the overparenting frenzy is taking a toll on the happiness of families. Parents and children engage in a race with the main goal of getting ahead of others, rather than just building useful skills. Moreover, this frenzy is a barrier against equal opportunities.

Rather than educating parents about the virtue of free-range parenting, which will not work if economic incentives are unchanged, we advocate policies that change economic incentives, that reduce the stakes in parenting, and that open up new opportunities for disadvantaged families. Fabrizio’s daughter grew up in a free-range Swedish daycare with a mix of children from a wide range of social, economic, and ethnic backgrounds. When the family moved to London for one year, she attended a posh exclusive (and expensive) nursery school. She was a happier child in Stockholm than in London. Some wealthy parents may be skeptical that their children can be happier in a more inclusive society. We hope we can open some cracks in those views.

Matthias Doepke is professor of economics at Northwestern University. He lives in Evanston, Illinois. Fabrizio Zilibotti is the Tuntex Professor of International and Development Economics at Yale University. He lives in New Haven, Connecticut.