April 4, 2014
Marina Azzimonti, FRB of Philadelphia
American politics have become increasingly polarized in recent decades. The deep political divide has caused significant government dysfunction. Political divisions make the timing, size, and composition of government policy less predictable. According to existing theories, an increase in the degree of economic policy uncertainty or the volatility of fiscal shocks results in a decline in economic activity. This occurs because businesses and households may be induced to delay decisions that involve high reversibility costs such as investment, hiring under search costs, or entry and exit. In addition, disagreement between policymakers may result in stalemate or, in extreme cases, a government shutdown. This adversely affects the optimal implementation of policy reforms and may result in excessive debt accumulation. Testing these theories has been challenging given the low frequency at which existing measures of partisan conflict have been computed: in most studies, the series is available only biannually. In this paper, Azzimonti provides a novel high-frequency indicator of the degree of partisan conflict. The index, constructed monthly for the period 1891 to 2013, uses a search-based approach that measures the frequency of newspaper articles that report lawmakers' disagreement about policy. The author shows that the long-run trend of partisan conflict behaves similarly to political polarization and income inequality, especially since the Great Depression. Its short-run fluctuations are highly related to presidential elections and wars but are unrelated to recessions. The author uses the index to study the effect on business cycles of an increase in partisan conflict equivalent to the one observed since the Great Recession. Using a simple VAR, she finds that an innovation to partisan conflict increases government deficits and significantly discourages investment, output, and employment. Moreover, these declines are persistent, which may help explain the slow recovery observed since the 2007 recession ended.
Roland Bénabou, Princeton University and NBER, and Davide Ticchi and Andrea Vindigni, IMT Institute for Advanced Studies Lucca
Bénabou, Ticchi, and Vindigni analyze the joint dynamics of religious beliefs and scientific-economic development. They emphasize in particular how this co-evolution is shaped by (and feeds back on) political conflicts and coalition formation along both religious and income lines. As part of their motivating evidence the authors also uncover a new fact: in both international and cross-state U.S. data, there is a significant negative relationship between religiosity and innovativeness (patents per capita) even after controlling for the standard empirical determinants of the latter. To shed light on the workings of the science-religion-politics nexus and its growth and distributional implications, the authors develop a model with three key features: 1, the recurrent arrival of scientific discoveries which, if widely diffused and implemented, generate productivity gains but sometimes also erode existing religious beliefs (a source of utility for some agents) by contradicting important aspects of the doctrine; 2, a government that can allow such ideas and innovations to spread, or spend resources to censor them and impede their diffusion; 3, a religious organization or sector (church or churches) that can, at a cost, undertake an adaptation of the doctrine that renders it more compatible with the new knowledge. The model leads to the emergence of three types of long-term outcomes. The first is a "secularization" or "Western European" regime with declining religiosity, unimpeded scientific progress, a passive church, and high levels of taxes and secular public spending. The second is a "theocratic" regime with knowledge stagnation, extreme religiosity, a church that makes no effort to adapt since its beliefs are protected by the state, and also high taxes but now used to subsidize the religious sector. Between these two is a third "American" regime that generally (not always) succeeds in combining unimpeded scientific progress and stable religiosity within a range where the state does not block new discoveries and the religious sector finds it worthwhile to invest in doctrinal repair and adaptation. This regime features lower taxes than the other two, but with positive revenue or tax exemptions allocated to religious activities. The authors show that in this "American" regime, a rise in income inequality can lead the religious rich to form a "religious-right" alliance with the religious poor and start blocking belief-eroding discoveries and ideas. Inequality can thus negatively affect knowledge and growth by inducing obscurantist, anti-science attitudes and policies.
Erik Meyersson, SITE, Stockholm School of Economics
Amine Ouazad, INSEAD, and Romain Ranciere, International Monetary Fund
Ouazad and Ranciere explore the effects of changes in lending standards on racial segregation within metropolitan areas. Such changes affect neighborhood choices as well as aggregate prices and quantities in the housing market. Using the credit boom of 200006 as a large-scale experiment, the authors put forward an instrumental variable strategy that predicts the relaxation of credit standards as the result of a credit supply shock predominantly affecting liquidity-constrained banks. The relaxed lending standards led to significant outflows of whites from black and from racially mixed neighborhoods: without such a credit supply shock, black households would have had between 2.3 and 5.1 percentage points more white neighbors in 2010.
Joan Esteban, Institut d'Analisis Economica, CSIC; Massimo Morelli, Columbia University; and Dominic Rohner, University of Zurich
Esteban, Morelli, and Rohner provide a model of conflict and mass killing decisions to identify the key variables and situations that make mass killings more likely to occur. They predict that mass killings are most likely in countries with large amounts of natural resource rents, polarization, institutional constraints regarding rent sharing, and low productivity of labor. The role of resources like oil, gas, and diamonds and other key determinants of mass killings is confirmed by the authors' empirical results based on country-level as well as ethnic-group-level analysis.
Pedro Bordalo, University of London; Nicola Gennaioli, Università Bocconi; and Andrei Shleifer, Harvard University and NBER
Bordalo, Gennaioli, and Shleifer present a model of stereotypes in which a decision maker assessing a group recalls only that group's most representative or distinctive types relative to other groups. Because stereotypes highlight differences between groups and neglect likely common types, they are especially inaccurate when groups are similar. In this case, stereotypes consist of unlikely, extreme types. When stereotypes are inaccurate they exhibit a form of base rate neglect. They also imply a form of confirmation bias in light of new information: beliefs overreact to information that confirms the stereotype and ignore information that contradicts it. However, stereotypes can change or rather, be replaced if new information changes the group's most distinctive trait. Applied to gender stereotypes, the model provides a unified account of disparate evidence regarding the gender gap in education and in labor markets. The authors also use the model to explore the determinants of neglected risks in financial markets.