23/7/20: Globalization and Populism: A Recent Study

I recently came across a fascinating paper by Dani Rodrik, an economist always worth reading. The paper, titled "Why Does Globalization Fuel Populism? Economics, Culture, and the Rise of Right-wing Populism" (NBER Working Paper No. 27526, July 2020) argues that "there is compelling evidence that globalization shocks, often working through culture and identity, have played an important role in driving up support for populist movements, particularly of the right-wing kind."

Rodrik carries out "an empirical analysis of the 2016 presidential election in the U.S. to show globalization-related attitudinal variables were important correlates of the switch to Trump."

• "Trump voters were more likely to be white, older, and college-educated. 
• "...they were significantly more hostile to racial equality and perceived themselves to be of higher social class. 
• "The estimated coefficient on racial attitudes is particularly large: a one-point increase in the index of racial hostility – which theoretically ranges from 1 to 5 – is associated with a 0.28 percentage point increase in the probability of voting for Trump (Table below, column 1). 
• "By contrast, economic insecurity does not seem to be associated with a propensity to vote for Trump.

"The finding that Trump voters thought of themselves as belonging to upper social classes ... largely reflects the role played by party identification in shaping voting preferences. When we control for Republican party identification (cols. 2 and 6), the estimated coefficient for social class drops sharply and ceases to be statistically significant."

"Note, however, that racial hostility remains significant, although its estimated coefficient becomes smaller (cols. 2 and 6)."

The other columns in the table above examine attitudes towards globalization (columns 2-5).

• "All three of our measures enter statistically significantly: 
• "Trump voters disliked trade agreements and immigration; 
• "They were also against bank regulation (presumably in line with the general anti-regulation views of (cols. 2-5) the Republican party). 
• "These indictors remain significant in the kitchen-sink version where they are all entered together (col. 6)."

"In none of these regressions does economic insecurity (financial worries) enter significantly. This
changes when we move from Trump voters in general to switchers from Obama to Trump (cols. 7-12). ... financial worries now becomes statistically significant, and switchers do not identify with the upper social classes. "

"Switchers are similar to Trump voters insofar as they too dislike trade agreements and immigration
(cols. 9-11). But they are dissimilar in that they view regulation of banks favorably. Hence switchers
appear to be against all aspects of globalization – trade, immigration, finance. the regression."


Rodrik postulates "a conceptual framework to clarify the various channels through which globalization can stimulate populism" on both "the demand and supply sides of politics". He also lists "the different causal pathways that link globalization shocks to political outcomes". 

Rodrik identifies "four mechanisms in particular, two each on the demand and supply sides:

• (a) a direct effect from economic dislocation to demands for anti-elite, redistributive policies; 
• (b) an indirect demand-side effect, through the amplification of cultural and identity divisions; 
• (c) a supply-side effect through political candidates adopting more populist platforms in response to economic shocks; and 
• (d) another supply-side effect through political candidates adopting platforms that deliberately inflame cultural and identity tensions in order to shift voters’ attention away from economic issues."

The full paper, accessible at https://www.nber.org/papers/w27526.pdf is choke full of other insights and is absolutely worth reading.

8/5/18: Law of Unintended Consequences and Complexity: Tax Cuts and Jobs Act 2017

The law of unintended consequences (or second order effects, as we call in economics) is ironclad: any policy reform has two sides to the coin, the side of forecasted and analyzed changes the reform engenders, and the side of consequences that appear after the reform has been enacted. The derivative proposition to this theorem is that the first side of the coin is what gets promoted by politicos in selling the reform, while the other side of the coin gets ignored until its consequences smack you in the face.

Behold the U.S. Tax Cuts and Jobs Act 2017, aka Trump's Tax Cuts, aka GOP's Gift for the Rich, aka... whatever you want to call it. Fitch Ratings recently released their analysis of the Act's unintended consequences, the impact the new law is likely to have on U.S. States' fiscal positions. And it is a tough read (see full note here: https://www.fitchratings.com/site/re/10025493).

"Recently enacted federal tax changes (H.R.1) are making budgeting and revenue forecasting more complex for many U.S. state governments," says Fitch. "...provisions including the cap on SALT deductions are a likely trigger behind a spike in state revenue collections for the current fiscal year. In Massachusetts for example, individual income tax collections through January 2018 were up nearly 12% from the prior year, this after the commonwealth recorded just 3% annual growth in January 2017. Many states are seeing robust year-over-year gains in revenue collections, though this will likely amount to little more than a one-time boost with income tax collections set to level off for the rest of the fiscal year."

State tax revenues can increase this year because, for example, of reduced Federal tax liabilities faced by households. As income tax at federal level falls, State tax deductions taken by households on their personal income for Federal tax liabilities will also fall, resulting in an increase in tax revenues to the States. Similarly, as Federal corporate income tax falls, and, assuming, corporate income rises, States will be able to collect increased revenues from the corporate activity domiciled in their jurisdictions. All of this implies higher tax revenues for the States. Offsetting these higher tax revenues, the Federal Government transfers to the individual states will likely decline as deficits balloon and as Pentagon demands an ever-greater share of Federal Budget.

In other words, the tax cuts are working, but do not expect these to continue working into the future. Or put differently, don't spend one-off revenue increases, folks. For high-spending States, like California, it is tempting to throw new money onto old bonfires, increasing allocations to public pensions and state hiring programs. But 2017 Tax Reform is a combination of permanent and temporary measures, with the latter more dominant than the former. Expiration of these measures, as well as complex interaction between various tax measures, suggest that the longer term effect of the Act on States' finances is not predictable and cannot be expected to remain in place indefinitely.

As Fitch noted: "Assessing the long-term implications of H.R. 1 will not be an easy task due to the complicated interrelationships of the law changes and because many of the provisions are scheduled to expire within the next decade. Yet-to-be finalized federal regulations around the tax bill and the possibility of additional federal legislation add more complexity and risk for states."

2/1/18: Limits to Knowledge or Infinity of Complexity?

Occasionally, mass media produces journalism worth reading not to extract a momentary piece of information (the news) of relevance to our world, but to remind ourselves of the questions, quests, phenomena and thoughts worth carrying with us through our conscious lives (assuming we still have these lives left). 

With that intro, a link to just such a piece of journalism: https://www.theatlantic.com/science/archive/2017/12/limits-of-science/547649/. This piece, published in The Atlantic, is worth reading. For at least two reasons:

Reason 1: it posits the key question of finiteness of human capacity to know; and

Reason 2: it posits a perfect explanation as to why truly complex, non-finite (or non-discrete) phenomena are ultimately not knowable in perfect sense.

Non-discrete/non-finite phenomena belong human and social fields of inquiry (art, mathematics, philosophy, and, yes, economics, psychology, sociology etc). They are defined by the absence of the end-of-the-game rule. Chess, go, any and all games invented by us, humans, have a logical conclusion - a rule that defines the end of the game. They are discrete (in terms of ability to identify steps that sequentially lead to the end-rule realisation) and they are finite (because they always, by definition of each game, result in either a draw or a win/loss - they are bounded by the end-of-game rule). 

Knowledge is, well, we do not know what it is. And hence, we do not know if the end-of-game rule even exists, let alone what it might be. 

Worth a read, folks.