American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article The Economic Future of Europe OlivierBlanchard 3 26 After three years of near stagnation, the mood in Europe is definitely gloomy. Many doubt that the European model has a future. In this paper, I argue that things are not so bad, and there is room for optimism. Over the last thirty years, productivity growth has been much faster in Europe than in the United States. Productivity levels are roughly similar today in the European Union and in the United States. The main difference is that Europe has used some of the increase in productivity to increase leisure rather than income, while the United States has done the opposite. Still not everything is well. Unemployment is still high, and Europe suffers from inefficient regulation. Here also however, there is more action than often perceived, and a wide ranging reform process is taking place. This process is driven by reforms in financial and product markets. Reforms in those markets are in turn putting pressure for reform in the labor market. Reform in the labor market is slowly taking place, but not without political tensions. These tensions dominate the news; but they are a symptom of change, not a reflection of immobility. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=1&issue_date=Fall 2004 10.1257/0895330042632735 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article The European Union: A Politically Incorrect View AlbertoAlesina RobertoPerotti 27 48 In this paper, we present our view of the recent evolution of European integration. We first briefly describe the main features of the institution and decision making process in the European Union, with particular attention to the debate between federalists and super nationalists. We then identify two key issues in the process of European integration: 1) an emphasis on "institutional balance" based on a complex web of institutions with overlapping jurisdiction; 2) A conflict between a dirigiste versus a more laissez faire approach to government. We argue that the first problem leads to a lack of clarity in the allocation of powers between European institutions, confusion in the allocation of prerogatives between national governments and EU institutions, and lack of transparency and accountability. The dirigiste culture also manifests itself in an abundant production of verbose rhetoric, which in our view is far from innocuous and direct set the European policy debate in the wrong direction. We then study how these problems play out in 4 important areas: employment policies, culture and scientific research, foreign and defense policies, and fiscal policy. Finally, we study the implications of the recently proposed European Constitution a potential solution of these two problems. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=2&issue_date=Fall 2004 10.1257/0895330042632780 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Why are European Countries Diverging in their Unemployment Experience? GillesSaint-Paul 49 68 During the nineties, unemployment fell in a number of European countries while it remained high in others. This Paper discusses potential causes for that evolution in light of recent economic research, emphasizing obstacles to reform due to political constraints, the prevalence of ideology, and agency issues within those bureaucracies concerned with the unemployment problem. Some speculative thoughts are offered as to why those factors might be more stringent in countries where unemployment remained high. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=3&issue_date=Fall 2004 10.1257/0895330042632672 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article How to Subvert Democracy: Montesinos in Peru JohnMcmillan PabloZoido 69 92 Which of the democratic checks and balances--opposition parties, the judiciary, a free press--is the most forceful? Peru has the full set of democratic institutions. In the 1990s, the secret-police chief Montesinos systematically undermined them all with bribes. We quantify the checks using the bribe prices. Montesinos paid a televisionchannel owner about 100 times what he paid a judge or a politician. One single television channel's bribe was five times larger than the total of the opposition politicians' bribes. By revealed preference, the strongest check on the government's power was the news media. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=4&issue_date=Fall 2004 10.1257/0895330042632690 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article The Muddles over Outsourcing JagdishBhagwati ArvindPanagariya T.N.Srinivasan 93 114 Critics have muddled the public debate over offshore outsourcing by using the term interchangeably to refer to altogether different phenomena such as on-line purchase of services, direct foreign investment and, sometimes, all imports. We argue that clarity requires distinguishing among these various phenomena and define outsourcing explicitly as the services trade at arm's length that does not require geographical proximity of the buyer and the seller--the so-called Mode 1 services in the WTO terminology--conducted principally via the electronic mediums such as the telephone, fax and Internet. The definition is appropriate because this is the phenomenon that is relatively new and scary in public consciousness and has fueled the recent "outsourcing" debate. Under this definition, the total number of the U.S. jobs outsourced annually is minuscule and is expected to remain so over the next decade, even on a gross basis (i.e., without adjusting for the jobs in-sourced from the U.S.). The fears that offshore outsourcing will lead to high-value jobs being replaced by low-value jobs down the road are also argued here to be implausible in view of several qualitative arguments to the contrary. We also demonstrate that offshore outsourcing of Mode 1 services raises no new analytical issues, contrary to what many fear. Thus, it leads to gains from trade (with the standard caveats applicable to conventional trade in goods) and, in specific cases, to income-distribution effects. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=5&issue_date=Fall 2004 10.1257/0895330042632753 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Oil and the Macroeconomy Since the 1970s Robert B.Barsky LutzKilian 115 134 Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth. In this paper, we review the arguments supporting such views. First, we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining macroeconomic fluctuations, and we trace how the arguments of proponents of the oil view have evolved in response to these difficulties. Second, we challenge the notion that at least the major oil price movements can be viewed as exogenous with respect to the US macroeconomy. We examine critically the evidence that has led many economists to ascribe a central role to exogenous political events in modeling the oil market, and we provide arguments in favor of "reverse causality" from macroeconomic variables to oil prices. Third, although none of the more recent oil price shocks has been associated with stagflation in the US economy, a major reason for the continued popularity of the oil shock hypothesis has been the perception that only oil price shocks are able to explain the US stagflation of the 1970s. We show that this is not the case. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=6&issue_date=Fall 2004 10.1257/0895330042632708 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article The Purchasing Power Parity Debate Alan M.Taylor Mark P.Taylor 135 158 Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to reestablish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it was first advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than thirty years, a distinct reversion in economic thought. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=7&issue_date=Fall 2004 10.1257/0895330042632744 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy LouisKaplow 159 175 Should the assessment of government policies, such as the provision of public goods and the control of externalities, deviate from first-best principles to account for distributive effects and the distortionary cost of labor income taxation? For example, is the optimal extent of public goods provision smaller than indicated by the Samuelson rule because finance is distortionary? Or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive? It is suggested that these questions are best addressed by considering distribution-neutral implementation, in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question. In basic cases, both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each. Thus, traditional first-best principles provide good benchmarks for policy analysis after all. Moreover, even when actual implementation will not be distribution neutral in aggregate, distribution-neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=8&issue_date=Fall 2004 10.1257/0895330042632726 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Urban Sprawl Thomas J.Nechyba Randall P.Walsh 177 200 This paper examines the role that insurance has played in dealing with terrorism before and after September 11, 2001, by focusing on the distinctive challenges associated with terrorism as a catastrophic risk. The Terrorism Risk Insurance Act of 2002 (TRIA) was passed by the U.S. Congress in November 2002, establishing a national terrorism insurance program that provides up to $100 billion commercial coverage with a specific but temporary risk-sharing arrangement between the federal government and insurers. TRIA's three-year term ends December 31, 2005, so Congress soon has to determine whether it should be renewed, whether an alternative terrorism insurance program should be substituted for it, or whether insurance coverage is left solely in the hands of the private sector. As input into this process, the paper examines several alternatives and scenarios, and discusses their potential to create a sustainable terrorism insurance program in the Unites States. http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=9&issue_date=Fall 2004 10.1257/0895330042632681 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Policy Watch: Challenges for Terrorism Risk Insurance in the United States HowardKunreuther ErwannMichel-Kerjan 201 214 http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=10&issue_date=Fall 2004 10.1257/0895330042632717 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Recommendations for Further Reading BernardSaffran 215 222 http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=11&issue_date=Fall 2004 10.1257/0895330042632762 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 18 4 Fall 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=JEP&volume=18&issue=4&issue_date=Fall 2004 Journal Article Notes 223 228 http://www.aeaweb.org/articles/article_detail.php?journal=JEP&volume=18&issue=4&article=12&issue_date=Fall 2004 10.1257/0895330042632771