Stephane Straub » economics

Infrastructure-based Stimulus

7 May 2013 by Straub | Category: economics

Sylvain Leduc and Daniel Wilson have this very interesting recent paper on the impact of infrastructure spending over the economic cycle.

We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.

While I have until now been quite sceptical of the macro literature on the impact of infrastructure investment on growth (I reviewed it in this paper, working paper version here), this contribution is a huge improvement, in particular because of its ability to exploits the formula-based mechanism governing the apportionment of federal highway funds to state governments as a way to identify an exogenous source of highway funding to states, which is reasonably independent of states’ own current economic conditions. The results, in terms of cyclicality of impact and recession vs. expansion effect, have quite interesting implications for the current debate on austerity vs. stimulus plans:

(…) we find that highway spending shocks positively affect GDP at two specific horizons. There is a significant impact in the first couple of years and then a larger second-round effect after six to eight years. The multipliers that we calculate from these impulse responses are large, between 1 and 3 on impact and between 3 and 7 at six to eight years out. Other estimates of local fiscal multip liers tend to be between 1 and 2.
We looked at three extensions that relate to the important current policy debate over the efficacy of countercyclical fiscal policy. Infrastructure spending, because it is perceived as being more productive (in the sense of increasing private sector productivity) than other types of spending, is often pointed to as
an attractive form of Keynesian spending. However, critics argue that the long lags between increases in infrastructure funding and actual spending make it unlikely that such spending can provide short-run stimulus. The results in this paper can help inform this debate. We found that, on average over our 1993–2010 sample period, unanticipated funding increases in a given state boost GDP in the short-run but do not boost employment. While the short-run GDP boost appears to be driven by funding shocks that occur during recessions, employment does not appear to rise even in this case. We also found that the short-run (and long-run) GDP effects of highway funding shocks are smaller for states whose GDP is growing slower than the median state. Overall, these results suggest that highway spending––at least the kind of highway spending typically done over the past twenty years––may not be well-suited to be an effective type of stimulus spending. On the other hand, we found that the highway funding shocks occurring during 2009, the year of the ARRA stimulus package as well as the trough of the Great Recession, had unusually large short-run impacts on GDP. A possible implication is that, on average, highway spending may not be especially effective at providing short-run stimulus, but that it can be more effective during times of very high economic slack and/or when monetary policy is at the zero lower bound.

Leave a comment | Share on Facebook | Share on Twitter
Reinhart and Rogoff: another one bites the dust

19 April 2013 by Straub | Category: economics

Although I am not a macroeconomist, I thought it would be worthwhile posting some links to what is currently agitating the blogo-, twittosphere, namely the debate about the potential debunking of a very influential paper by researchers Carmen Reinhart and Kenneth Rogoff on the adverse growth effects of high debt levels (above 90% of GDP).

This review on the Bruegel blog, dubbed “the Reinhart and Rogoff debacle“, offers a pretty neat overview of the facts of the matter, including links to the original contributions and the recent criticisms.

Difficult also to avoid mentioning Paul Krugman’s reaction to the story. The latest NYT OP-ED is probably a good place to start, and he has also had several blog posts in recent days, both on the academic controversy, and on the broader policy issue. It’s true that it is hard to think of a hotter economic policy topic right now, and this comes at a time when austerity is being increasingly challenged in many political, academic and intellectual circles (or at least it seems to me).

Beyond this, a few thoughts come to my mind:

- Most economists know very well the limits of the type of empirical exercise that is based on cross-country aggregate data, which is the case of the one conducted by Reinhart and Rogoff. It’s certainly not completely useless, but we have 2 decades of experience telling us about the fragility of such results, in particular when it comes to causality. How is it possible that such papers become so prominent and their lessons taken so seriously (other recent examples include of course the Alesina-Ardagna paper on taxes versus spending already mentioned in the Krugman part above, but also for more development oriented debates, the Burnside and Dollar (2000, American Economic Review) paper on the positive effect of aid on growth among others)? (on a personal note, if I, modest and unknown researcher, were to present today a cross-country exercise in a seminar in front of a knowledgeable academic audience in some high-level university, I would probably not reach the end of the seminar alive. The rules must not be the same for everybody!) In any case, I see a lot of commentators keen to use the conclusions of such papers in opinion pieces, presenting these views to the general public as if there were eternal truths, while in fact all we know is that we don’t know for sure. We need to be a bit more cautious!

- Should papers proven to be factually or technically wrong be retracted by economic journals, as is common in general science journals? Flawed publications that are maintained are often still quoted as true long after they’ve been proven wrong (well, retracted papers also for that matter, but at least retraction allows this to be addressed). Another example that comes to my mind from the development literature is Emily Oster’s Journal of Political Economy paper on the link between hepatitis B and missing women in India (see this column by Stephan Klasen for a summary). Again, the economic profession is under such pressure to deliver correct diagnostic and to prove it’s free of conflict of interests, that we should probably think harder about how to improve our internal rules, our publication process, etc.

Leave a comment | Share on Facebook | Share on Twitter
Eau, source de conflits ? Table ronde au Muséum de Toulouse

9 April 2013 by Straub | Category: economics, professional

Jeudi 11/04 je participerai à une table ronde ouverte au public au Muséum de Toulouse.

Les enjeux du partage de l’eau et la capacité des institutions à y faire face

A l’échelle internationale se jouent déjà des batailles pour l’eau.
Que ce soient les questions relatives à l’accès, au partage ou à la gestion de cette ressource naturelle, les logiques et les intérêts des acteurs politiques et économiques divergent et donnent déjà naissance à des conflits. De ces derniers nous parviennent des échos alarmants, véhiculés par de grands médias.
Mais qu’en est-il vraiment ? Les juristes de l’université Toulouse 1 Capitole et les économistes de Toulouse School of Economics (TSE) alimenteront la réflexion collective et citoyenne.
Les juristes de l’université Toulouse 1 Capitole et les économistes de Toulouse School of Economics (TSE) alimenteront la réflexion collective et citoyenne.

Je parlerai de ce que je connais, c’est à dire des différentes expériences d’implications du secteur privé dans le domaine de la gestion de l’eau (concessions, privatisations), en particulier en Amérique latine. Il s’agit bien sur d’un sujet plutôt polémique, et je m’attacherai à montrer que les enseignements des différentes expériences à travers le monde sont sans doute plus variés et moins simples que l’on ne l’entend parfois. Je mettrai sans doute un résumé de cette intervention sur le blog dans quelque temps.

Par ailleurs, j’en profite pour attirer l’attention sur cette note publiée par mon collègue Stéphane Saussier de l’IAE de Paris, sur le lien entre modes de gestion, prix de l’eau et renouvellement des délégations de services publics au niveau des communes françaises (à noter que ce travail s’inscrit dans le cadre de la chaire EPPP, que Stéphane anime depuis plusieurs années, et que j’accompagne comme membre du comité scientifique). Là encore, les résultats sont plus nuancés que beaucoup de discours le laissent entendre.

L’étude est basée sur une base de données concernant 5 000 collectivités locales constituant un échantillon représentatif de l’ensemble des collectivités françaises (les collectivités de plus de 10 000 habitants sont toutes présentes dans l’échantillon). Ces collectivités ont été interrogées plusieurs fois sur une période de 10 années (en 1998, 2001, 2004, 2008) afin de collecter de l’information sur la production et la distribution d’eau, les prix, les caractéristiques du réseau de distribution, l’origine de l’eau, la qualité de l’eau distribuée, le mode de traitement utilisés, la densité de population, le mode de gestion, la date de début et de fin du contrat de DSP ainsi que d’autres éléments pouvant affecter les coûts de production d’eau et d’exploitation du réseau et in fine, le prix de l’eau (voir l’article correspondant à cette note pour plus de détails : http://chaireeppp.org/node/471). Au final nous travaillons sur un échantillon donnant de l’information sur les réseaux desservant plus de 75% de la population française. 63% des collectivités observées gèrent leur service d’eau en DSP ; 37 % en régie. Nous observons les prix de 1410 collectivités en régie et de 2053 collectivités en DSP ainsi que l’évolution des modes de gestion sur la période 98-08 (…)
Les résultats que nous obtenons suggèrent que :
• Le prix s’explique assez bien comme une fonction des difficultés liées à la fourniture du service d’eau
• L’impact du mode de gestion apparaît comme secondaire dans la détermination du prix payé par le consommateur dès lors qu’on effectue une analyse toutes choses égales par ailleurs. Cet impact doit être différencié selon la taille des collectivités concernées.
- Le choix de la DSP ou de la régie n’impacte pas sur le prix observé pour les collectivités de + de 10 000 habitants
- Le choix de la DSP augmente prix observé pour les collectivités de – de 10 000 habitants. Il augmente la facture moyenne d’environ 8%, toutes choses égales par ailleurs
• La décision des collectivités en DSP de ne pas renouveler le concessionnaire sortant (changement d’opérateur ou retour en régie)
- S’explique pour les collectivités de + de 10 000 habitants par l’écart entre le prix théorique et le prix observé
- Ne s’explique pas avec les données à notre disposition pour les collectivités de – de 10 000 habitants
• La décision des collectivités en régie de passer en DSP
- S’explique pour les collectivités de + de 5 000 habitants par l’écart entre le prix théorique et le prix observé
- Ne s’explique pas avec les données à notre disposition pour les collectivités de – de 5 000 habitants
• La couleur politique et l’identité des maires des collectivités concernées n’influent que très marginalement sur les résultats.

Leave a comment | Share on Facebook | Share on Twitter
Toulouse Workshop on Procurement and Infrastructure

11 March 2013 by Straub | Category: economics, professional

On Thursday and Friday (14-15 mars 2013), I am organizing this workshop on Procurement and Infrastructure.
It will gather, over two days, researchers from academia and international organizations working on the topics of infrastructure and procurement, with a focus on the particular issues of developing and emerging countries. The program will include research papers, practitioners’ presentations and PhD sessions.Toulouse, France

Leave a comment | Share on Facebook | Share on Twitter
Firms Operating under Electricity Constraints in Developing Countries

11 March 2013 by Straub | Category: economics

Just published in the World Bank Economic Review, my paper with Philippe Alby and Jean-Jacques Dethier, which looks at the impact of failures in electricity supply on the investment behavior and the resulting shape of industrial structure:

Firms Under Electricity Constraints WBER 2012:
Many developing countries are unable to provide their industrial sectors with reliable electric power, with the result that many enterprises must contend with an insufficient and unreliable supply of electricity. Because of these constraints, enterprises often opt for self-generation of electricity even though it is widely considered a second-best solution. This paper develops a theoretical model of investment behavior in remedial infrastructure in the presence of physical constraints. It then illustrates the model’s predictions using a large cross-country sample of enterprises from the World Bank Enterprise Survey database. Electricity-intensive sectors in high-outage countries are characterized by a significantly lower share of small firms.

Leave a comment | Share on Facebook | Share on Twitter
Dire austerity

5 March 2013 by Straub | Category: economics

A recent blog post by Simon Wren-Lewis, on how current austerity measures are pushing Europe even deeper into recession.

This is all very crude, but the basic message remains unchanged. Once we correct for the economic cycle, the core of the Eurozone are expected to run surpluses that are sufficient to bring down the level of debt, whereas the US, UK and Japan are planning to run deficits. In normal times, and particularly if we were in boom times, the Eurozone could rightly congratulate itself, and make disdainful remarks about policy elsewhere. During the current period in which the private sector is running an unusually high level of net saving it is completely the wrong policy. As the textbooks tell us, without the will or ability to provide offsetting monetary stimulus, this level of austerity will cause a recession, and sure enough it has.

I guess the ruling elite in the Eurozone are telling themselves that the current recession is all a result of the 2010 crisis caused by profligate governments in the periphery, and that if everyone pulls together by cutting spending and raising taxes things will come good. That has been the story for the past two years, and we are still waiting. Those who opposed this policy said that the market crisis could only be solved by ECB action, and that has turned out to be the case. We also said austerity of this kind would kill any recovery, and on that we were also right. So with macroeconomic theory, plenty of empirical evidence and recent events on our side, there is just no contest in terms of which narrative is correct.

Foud for thought at a time when the French government prepares even more austerity measures (see Le Monde today):

“On est à l’os”, entend-on de tous côtés. “Ce n’est pas le train de vie de l’Etat auquel on touche désormais, c’est aux moyens d’assurer les missions de service public.”

Graffiti in Norwich, England, in July. [Photo by Gerry Balding]

Leave a comment | Share on Facebook | Share on Twitter