Recommendations for Further Reading
Timothy Taylor is Managing Editor, Journal of Economic Perspectives, based at Macalester College, Saint Paul, Minnesota. He blogs at http://conversableeconomist.blogspot.com.
This section will list readings that may be especially useful to teachers of undergraduate economics, as well as other articles that are of broader cultural interest. In general, with occasional exceptions, the articles chosen will be expository or integrative and not focus on original research. If you write or read an appropriate article, please send a copy of the article (and possibly a few sentences describing it) to Timothy Taylor, preferably by email at email@example.com, or c/o Journal of Economic Perspectives, Macalester College, 1600 Grand Ave., Saint Paul, Minnesota, 55105.
Luigi Zingales delivered the Presidential Address to the American Finance Association: "Does Finance Benefit Society?" "From Libor fixing to exchange rate manipulation, from gold price rigging to outright financial fraud in subprime mortgages, not a day passes without a news of a fresh financial scandal. After the financial crisis, Americans’ trust towards bankers has dropped tremendously and has not yet fully recovered. It is very tempting for us academics to dismiss all these feelings as the expression of ignorant populism. After all, we are the priests of an esoteric religion, only we understand the academic scriptures and can appreciate the truths therein revealed. For this reason, we almost wallow in public disdain and refuse to engage, rather than wonder whether there is any reason for these feelings. This is a huge mistake. . . . First of all, acknowledge that our view of the benefits of finance is inflated. While there is no doubt that a developed economy needs a sophisticated financial sector, at the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society. In fact, we have both theoretical reasons and empirical evidence to claim that a component has been pure rent seeking. By defending all forms of finance, by being unwilling to separate the wheat from the chaff, we have lost credibility in defending the real contribution of finance. Our second task is to use our research and our teaching to curb the rent-seeking dimension of finance. We should use our research to challenge the existing practices in finance and blow the whistle on what does not work. We should be the watchdogs of the financial industry, not its lapdogs.” Published in the Journal of Finance, August 2015, vol. 70, no. 4, pp. 1327–63. The version prepared for the address is available at http://faculty.chicagobooth.edu/luigi.zingales/papers/research/Finance.pdf.
W. Kip Viscusi and Ted Gayer discuss “Behavioral Public Choice: The Behavioral Paradox of Government Policy.” “[T]he behavioral economics literature . . . frequently recommends ‘soft paternalism’ policies that seek to change the structure of the choices available to individuals in order to encourage a more desirable outcome. But, as behavioral agents themselves, policymakers and regulators are subject to the same psychological biases and limitations as all individuals. Many, although certainly not all, behavioral economics papers focus on the biases and heuristics of ordinary individuals, while seemingly ignoring that regulators are people too and thus subject to the same psychological forces. One study finds that, of the behavioral economics articles proposing paternalistic policy responses, 95.5% do not contain any analysis of the cognitive abilities of policymakers . . . Professor Cass Sunstein observes, ‘For every bias identified for individuals, there is an accompanying bias in the public sphere.’” Harvard Journal of Law & Public Policy, 2015, vol. 38, no. 3, pp. 973–1007, http://www.harvard-jlpp.com/wp-content/uploads/2010/01/ViscusiGayer_4.pdf.
Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns, and Steve Rosenthal take stock of the issues concerning “Financial Transaction Taxes in Theory and Practice.” “Proponents advocate the FTT [financial transactions tax] on several grounds. The tax could raise substantial revenue at low rates because the base—the value of financial transactions—is enormous. An FTT would curb speculative short-term and high-frequency trading, which in turn would reduce the diversion of valuable human capital into pure rent-seeking activities of little or no social value. They argue that an FTT would reduce asset price volatility and bubbles, which hurt the economy by creating unnecessary risk and distorting investment decisions. It would encourage patient capital and longer-term investment. The tax could help recoup the costs of the financial-sector bailout as well as the costs the financial crisis imposed on the rest of the country. The FTT—called the ‘Robin Hood Tax’ by some advocates—would primarily fall on the rich, and the revenues could be used to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt. Opponents counter that an FTT is an ‘answer in search of a question’.” In the conclusion, they write: “An FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes and across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution. Over the long term, it appears poorly targeted at the kinds of financial-sector excesses that led to the Great Recession.” Tax Policy Center, June 2015, http://www.taxpolicycenter.org/UploadedPDF/2000287-Financial-Transaction-Taxes-in-Theory-and-Practice.pdf.
Roc Armenter discusses “A Bit of a Miracle No More: The Decline of the Labor Share.” “Until recently, the division between labor and capital income had not received much attention. The reason was quite simple: Labor’s share never ventured far from 62 percent of total U.S. income for almost 50 years—through expansions, recessions, high and low inflation, and the long transition from an economy primarily based on manufacturing to one mainly centered on services. As it happened, the overall labor share remained stable as large forces pulling it in opposite directions canceled each other out—a coincidence that John Maynard Keynes famously called ‘a bit of a miracle.’ But the new millennium marked a turning point: Labor’s share began a pronounced fall that continues today. . . . [U]ntil 2001, the BLS’s methodology assigned most of proprietor’s income to the labor share, a bit more than four-fifths of it. Since then, less than half of proprietor’s income has been classified as labor income. . . . [A]t least one-third and possibly closer to half of the drop in the headline labor share is due to how the BLS treats proprietor’s income.” Business Review, Federal Reserve Bank of Philadelphia, Third Quarter 2015, pp. 1–7, https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/2015/q3/brq315_a_bit_of_a_miracle_no_more.pdf.
Ronald Lee and Peter R. Orzag chaired a recent committee on behalf of the National Academies of Sciences, Engineering, and Medicine that discusses “The Growing Gap in Life Expectancy by Income: Implications for Federal Programs and Policy Responses.” “The implication of these differential trends is that the gap in life expectancies is expanding rapidly. For males born in the 1930 cohort, the highest quintile’s life expectancy at age 50 is 5.1 years longer than the lowest quintile’s. For males born in the 1960 cohort, the projected gap widens to 12.7 years. For females, the results appear even more pronounced, although the estimates are less reliable. . . . The result is that the gap in life expectancy between high-earning females and low-earning females is projected to expand from 4 years to 13.6 years. . . . Actual and projected population aging raise the costs of government programs for the elderly, leading to fiscal pressures and a likely policy response. . . . [T]this report evaluates a number of policy changes from the perspective of the impact of differential trends in mortality on lifetime benefits by earnings quintile, a perspective that has rarely been applied in previous policy analyses.” 2015, http://www.nap.edu/catalog/19015/the-growing-gap-in-life-expectancy-by-income-implications-for.
The World Health Organization, in its WHO Report on the Global Tobacco Epidemic 2015, focuses on the theme “Raising taxes on tobacco.” “Despite the fact that raising tobacco taxes to more than 75% of the retail price is among the most effective and cost-effective tobacco control interventions (it costs little to implement and increases government revenues), only a few countries have increased tobacco taxes to best practice level. . . . with only 10% of the world’s people living in countries with sufficiently high taxes . . .” “Research from high-income countries generally finds that a 10% price increase will reduce overall tobacco use by between 2.5% and 5% (4% on average). . . . Most estimates from low- and middle-income countries show that a 10% price increase will reduce tobacco use by between 2% and 8% (5% on average). Studies from a number of countries typically show that half of the decline in tobacco use associated with higher taxes and prices results from reduced prevalence (i.e. from users quitting). The remaining half comes from reduced intensity of use (i.e. users consuming less by switching from daily to occasional smoking, or reducing the number of cigarettes smoked each day). . . . Tax and price increases in Brazil explain nearly half of the 46% reduction in adult smoking prevalence between 1989 and 2010. . . . In Thailand, the Asian Development Bank estimates that 60% of the deaths averted by a 50% tobacco price increase would be concentrated in the poorest third of the population, who would pay only 6% of the increased taxes. . . . In China, research suggests that raising taxes on cigarettes so that they account for 75% of retail prices—up from 40% of the share of price in 2010—would avert nearly 3.5 million deaths that would otherwise be caused by cigarette smoking.” 2015. http://apps.who.int/iris/bitstream/10665/178574/1/9789240694606_eng.pdf.
Melissa D. Aldridge and Amy S. Kelley discuss the “Epidemiology of Serious Illness and High Utilization of Health Care.” “As of 2011, the top 5 percent of health care spenders (18.2 million people) accounted for an estimated 60 percent of all health care costs ($976 billion) . . . In this high-cost subgroup, total annual costs ranged from approximately $17,500 to more than $2,000,000 per person . . .” The essay appears as Appendix E in a 2015 National Academy of Sciences report from a committee chaired by Philip A Pizzo and David M. Walker called Dying in America: Improving Quality and Honoring Individual Preferences Near the End of Life. 2015, http://www.nap.edu/openbook.php?record_id=18748.
Long-Term Interest Rates
The Bank of International Settlements writes in its 85th Annual Report: “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for maneuver in macro-economic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.” “Our lens suggests that the very low interest rates that have prevailed for so long may not be ‘equilibrium’ ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates.” June 28, 2015, http://www.bis.org/publ/arpdf/ar2015e.pdf.
João Amador and Filippo di Mauro have edited The Age of Global Value Chains: Maps and Policy Issues, a VoxEU.org eBook from the Centre for Economic Policy Research. The volume includes an introduction, 13 essays, and a data appendix. From the introduction by Amador and di Mauro: “Due to coordination costs, proximity was very important up until the mid-1980s. It was only then that the information and communication technology (ICT) revolution made it possible to reduce those costs by enabling complexity to be coordinated at a distance. . . . The possibility of relocating the different stages of production theoretically enabled different tasks within a production process to be performed by geographically dispersed production units. This was termed the ‘second unbundling’ in international trade, leading to the sharing of production between developed and developing economies from the mid-1980s onwards. . . . The relocation of these stages of manufacturing to developing countries fostered high growth rates in emerging markets and was further enhanced by domestic policies aimed at attracting foreign capital. As a consequence, the ‘second unbundling’ reversed the previous industrialization/non-industrialization pattern prevalent in developed and developing countries. This change of fortunes represents one of the biggest economic transformations of the last decades and it reshaped, and will continue to shape, the balance of power in both international and economic relations. . . . [A]bout 60% of global trade consists of trade in intermediate goods and services, which are then incorporated at different stages of production.” 2015, http://www.voxeu.org/sites/default/files/GVCs-ebook.pdf .
Finance & Development (published by the International Monetary Fund) has a seven-paper symposium titled “Latin America: Finding Its Footing.” The tone of the discussion concerns “the many challenges facing the region today” and how to go about “avoiding a prolonged slowdown.” The lead essay by José Antonio Ocampo sets the stage: “But this positive picture has changed dramatically. Growth per capita ground to a halt in 2014 and much of the region is again viewed with a sense of forgone promise. . . . In contrast to the halcyon decade that ended in 2013, the recent economic performance of Latin America has been poor. Growth fell sharply in 2014 to just 1.1 percent—barely above the region’s current low population growth of 1.0 percent—and will continue at a similar or even lower rate in 2015 . . . Investment also declined in 2014, and will continue to do so in 2015. Poverty ratios have stagnated at 2012 levels . . . and, although no hard data are yet available, this seems also true of income distribution.” September 2015, http://www.imf.org/external/pubs/ft/fandd/2015/09/pdf/fd0915.pdf.
Julie P. Smith discusses “Market, Breastfeeding and Trade in Mother’s Milk” as part of a symposium on the economics of breastfeeding. “Human milk is being bought and sold. Commodifying and marketing human milk and breastfeeding risk reinforcing social and gender economic inequities. Yet there are potential benefits for breastfeeding, and some of the world’s poorest women might profit. How can we improve on the present situation where everyone except the woman who donates her milk benefits?” International Breastfeeding Journal, 2015, 10:9, http://www.internationalbreastfeedingjournal.com/content/pdf/s13006-015-0034-9.pdf. This and eight other articles on aspects of the economics of breastfeeding are available at http://www.internationalbreastfeedingjournal.com/series/economicaspects
Douglas Clement has an “Interview with Amy Finkelstein.” On the topic of whether health insurance will tend to attract the relatively unhealthy: “Suppose you have people—in health insurance we often refer to them as the ‘worried well’—who are healthy, so a low-risk type for an insurer, but also risk averse: They’re worried that if something happens, they want coverage. . . . As a result, people who are low risk, but risk averse, will also demand insurance, just as high-risk people will. And it’s not obvious whether, on net, those with insurance will be higher risk than those without. . . .” On the question of what Medicaid is worth to recipients: “[O]ur central estimate is that the value of Medicaid to a recipient is about 20 to 40 cents per dollar of government expenditures. . . . The other key finding is that the nominally ‘uninsured’ are not really completely uninsured. We find that, on average, the uninsured pay only about 20 cents on the dollar for their medical care. This has two important implications. First, it’s a huge force working directly to lower the value of Medicaid to recipients; they already have substantial implicit insurance. . . . Second and, crucially, the fact that the uninsured have a large amount of implicit insurance is also a force saying that a lot of spending on Medicaid is not going directly to the recipients; it’s going to a set of people who, for want of a better term, we refer to as ‘external parties.’ They’re whoever was paying for that other 80 cents on the dollar.” The Region, Federal Reserve Bank of Minneapolis, September 2015, https://www.minneapolisfed.org/publications/the-region/interview-with-amy-finkelstein.
David A. Price has an “Interview” with Campbell Harvey. Here are some thoughts on the difference between research on finance inside a company and in academia: “To be published in academic finance or economics, the idea must be unique; it’s the same in the practice of finance—you’re looking to do something that your competitors haven’t thought of. There are differences, though. The actual problems that are worked on by practitioners are more applied than the general problems we work on in financial economics. The second difference is that in academic financial economics, you have the luxury of presenting your paper to colleagues from all over the world. You get feedback, which is really useful. . . . In business, it’s different; you cannot share trade secrets. You really have to lean on your company colleagues for feedback. The third thing that’s different is access to data for empirical finance. When I was a doctoral student, academia had the best data. For years after that, the pioneering academic research in empirical finance relied on having this leading-edge data. That is no longer the case. The best data available today is unaffordable for any academic institution. It is incredibly expensive and that’s a serious limitation in terms of what we can do in our research. . . . The fourth difference is the assistance that’s available. Somebody in academia might work on a paper for months with a research assistant who might be able to offer five to 10 hours per week. In the practice of management, you give the task to a junior researcher and he or she will work around the clock until the task is completed. What takes months in academic research could be just a few days. The fifth difference is computing power. Academics once had the best computing power. We have access to supercomputing arrays, but those resources are difficult to access. In the practice of management, companies have massive computer power available at their fingertips. For certain types of studies, those using higher frequency data, companies have a considerable advantage.” Econ Focus, Federal Reserve Bank of Richmond, First Quarter 2015, 26–30, https://www.richmondfed.org/publications/research/econ_focus/2015/q1/interview.
In David Colander’s “Economics with Attitude” column, he writes: “Economic Theory Has Nothing to Say about Policy (and Principles Textbooks Should Tell Students That).” “Let me start with a quiz: Question 1: According to economic theory, whenever possible government should avoid tariffs. Question 2: According to economic theory, the minimum wage lowers the welfare of society. Question 3: According to economic theory, if there are no externalities, the market is the preferable way of allocating resources. The correct answer to each of these questions is false; economic theory, on its own, has nothing to say about policy.” Eastern Economic Journal, Fall 2015, vol. 41, no. 4, pp. 461–65, http://www.palgrave-journals.com/eej/journal/v41/n4/pdf/eej201531a.pdf.
The Task Force on Federal Regulation of Higher Education, made up of high- level college and university administrators, has published its report called Recalibrating Regulation of Colleges and Universities. “Another far-reaching analysis was launched by Vanderbilt University in 2014. Initial findings reveal that approximately 11 percent, or $150 million, of Vanderbilt’s 2013 expenditures were devoted to compliance with federal mandates. Nearly 70 percent of these costs were absorbed into different offices, affecting a broad swath of faculty, research staff, administrative staff, and trainees in academic departments.” As one of many examples in the report of high costs of federal mandates: “Guidance from the Department both in the Handbook for Campus Safety and Security Reporting and subsequent directives indicate that colleges and universities must report crimes that happen in any building or property they rent, lease, or have any written agreement to use (including an informal agreement, such as one that might be found in a letter, email, or hotel confirmation). Even if no payment is involved in the transaction, any written agreement regarding the use of space gives an institution ‘control’ of the space for the time period specified in the agreement. . . . Department guidance mandates that schools report on study abroad locations when the school rents space for students in a hotel or other facility, and on locations used by an institution’s athletic teams in successive years (e.g., the institution uses the same hotel every year for the field hockey team’s away games). As a consequence, institutions must attempt to collect crime data from dozens, if not hundreds, of locations . . . One institution has indicated that it requests data from 69 police departments, covering 348 locations in 13 states and five countries, including police at airports and on military bases. The mandate that colleges and universities must collect data from foreign entities is particularly troublesome. . . . In response to one such request, a foreign government accused a U.S. institution of espionage.” February 2015, http://www.help.senate.gov/imo/media/Regulations_Task_Force_Report_2015_FINAL.pdf.