Worthwhile Economics Read by Brad DeLong

Orszag: Increasing the Value of Federal Spending on Health Care

Peter Orszag (2008), "Increasing the Value of Federal Spending on Health Care" http://www.cbo.gov/ftpdocs/95xx/doc9563/07-16-HealthReform.pdf

Mullainathan and Shleifer: The Market for News

Sendhil Mullainathan and Andrei Shleifer (2005), >“The Market for News,”AER 95, 4, September 2005, pp. 1031-1053.

Burman and Randolph: Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data

Len Burman and William Randolph (1994), "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data":

The authors use panel data and information about differences in state tax rates to separate the effects of transitory and permanent tax rate changes on capital-gains realizations behavior. The estimated effect of permanent change is substantially smaller than the effect of transitory change. The difference is even larger than differences between estimates from past micro data studies, which have primarily measured the transitory effect, and time-series studies, which have primarily measured the permanent effect. The authors' results resolve a long-standing conflict between micro data and time-series studies of how marginal tax rates affect capital-gains realizations behavior.

McCallum: The U.S. Monetary Experience of 1979-1982

Bennett McCallum (1989), "The U.S. Monetary Experience of 1979-1982"

Neary: The Stolper-Samuelson Theorem

J. Peter Neary (2004), "The Stolper-Samuelson Theorem" http://www.ucd.ie/economic/staff/pneary/pdf/stolpers.pdf

Galbraith: The Collapse of Monetarism

James Galbraith (2008), "The Collapse of Monetarism" http://utip.gov.utexas.edu/papers/CollapseofMonetarismdelivered.pdf

Goldin: The Quiet Revolution That Transformed Women’s Employment, Education, and Family

Claudia Goldin, "The Quiet Revolution That Transformed Women’s Employment, Education, and Family" http://www.economics.harvard.edu/faculty/goldin/files/GoldinEly.pdf

Krugman: Notes on Speculation

Paul Krugman (2008), "Notes on Speculation" :

About 20 years ago there was an argument about exchange rates and the trade balance.... The issue then was whether the United States had to have a real depreciation — a fall in the relative price of its goods and services — to reduce its trade deficit. A significant number of well-trained economists said no... if capital inflows fell, so would the trade deficit — no need for real exchange rate changes. John Williamson had the perfect phrase for this delusion: he called it “the doctrine of immaculate transfer.” The point was that ultimately, to reduce the trade deficit something had to provide incentives for higher exports and lower imports; the financial markets could only affect trade to the extent that they changed those incentives. Right now I see well-trained economists getting caught up in an equivalent fallacy.... Whatever you say about the futures market, it can only drive up the spot price by causing physical hoarding of physical goods....

[S]ome readers have asked me why my inventory argument didn’t apply to the housing bubble. The answer is that a house is a durable good.... To see the equivalent in housing of what the oil bubble types think they’re seeing in oil, we’d have to have seen a sharp rise in rental rates. It didn’t happen....

Third, some people have asked what I said about the California energy crisis of 2000-2001, perhaps history’s greatest example of market manipulation.... During that whole period, I was pretty much the only voice in a major news outlet even suggesting that market manipulation might be a central factor. And here’s the thing: I applied pretty much the same reasoning to that crisis that I’m applying now. The only way market manipulators could have been driving up prices was by keeping physical supply off the market. And they were in fact doing just that: there was huge unused generating capacity, consistent with the idea of deliberate withholding. Some years later we would actually get hold of control room tapes in which Enron traders called plants and told them to shut down, and boasted about cutting off Grandma Millie’s power. I’m still waiting for evidence that physical withholding is going on in the oil market.

Acemoglu, Johnson, Querubín, and Robinson: Central bank independence: failures, successes and the “seesaw effect”

Daron Acemoglu, Simon Johnson, Pablo Querubín, and James A Robinson (2008), Central bank independence: failures, successes and the “seesaw effect”:

Lansing: Speculative Bubbles and Overreaction to Technological Innovation

Kevin Lansing (2008), "Speculative Bubbles and Overreaction to Technological Innovation"

The dramatic rise in U.S. stock prices during the late 1990s, followed similarly by U.S. house prices during the mid-2000s, are episodes that have both been described as bubbles.... Caballero et al. (2006) argue that rapidly rising stock prices provided firms with a low-cost source of funds from which to finance their investment projects. The resulting surge in capital accumulation served to increase measured productivity growth which, in turn, helped to justify the enormous run-up in stock prices.... History tells us that periods of major technological innovation are often accompanied by speculative bubbles as investors overreact to genuine advances in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation.... On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. On the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem...

Eichengreen: Asian macro policy is out of kilter

Barry Eichengreen (2008), "Asian macro policy is out of kilter"

What should Asian central banks do now? They should raise rates.... It makes no sense when most Asian countries are growing at or near capacity that they should have negative real interest rates. Negative real rates are an unhealthy subsidy for borrowing by households and firms. They encouraged inefficient investment and excessive leverage in Asia in the first half of the 1990s, and we all know what followed. These negative interest rates and their artificial stimulus to consumption and investment are also why we haven’t seen more of a slowdown in Asia – why we haven’t seen more recoupling.... Critics of inflation targeting will say that central banks have a dual mandate not just to fight inflation but also to foster growth and that Asian central banks have no business raising rates in a deteriorating growth environment. But the fact of the matter is that they now face a very serious test of their credibility, leaving no alternative to tightening. The alternative to painful interest rate increases now will be even more painful increases later...

Quiggin: Equity between overlapping generations

John Quiggin (2008), "Equity between overlapping generations" http://www.uq.edu.au/rsmg/WP/WPC08_01.pdf

Tax Policy Center: A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans

Tax Policy Center (2008), "A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans" http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf

Blattman and Miguel: Civil War

Christopher Blattman and Edward Miguel (2008), "Civil War" http://www.chrisblattman.org/JEL-Civil-War_11jun08.pdf:

Most of the world’s nations have experienced an internal armed conflict since 1960. The past decade has witnessed an explosion of economics research into the causes and consequences of civil wars, belatedly bringing the topic into the mainstream of economics. This article critically surveys advances in this emerging, interdisciplinary literature and charts productive ways forward. Formal theory has centered on a central puzzle: why do civil wars occur at all? Given the high costs of war, groups have every incentive to reach an agreement that avoids fighting. Explanations have focused on information asymmetries and the inability to sign binding contracts in the absence of the rule of law. Economic theory has tended to ignore, however, the thornier (but equally important) problems of why antagonistic armed groups form and cohere, and why individuals decide to fight. Likewise, the actual behavior of armed organizations and their leaders is not well understood. On the empirical side, a vast cross-country econometric literature has aimed to identify the causes of civil war, with geographic conditions favoring insurgency and low per capita incomes the most robust relationships. We argue that to truly decipher conflict’s causes, and understand the recruitment, organization, and conduct of armed groups, micro-level analysis and data will be needed. Finally, turning to the economic legacies of war, we frame the literature in terms of neoclassical economic growth theory. Emerging stylized facts include the ability of some economies that to experience rapid macroeconomic recoveries, while certain human capital impacts appear more persistent. Yet econometric identification has not been adequately addressed, and there is little consensus on the most effective policies to promote postwar recovery. The evidence base is weakest where it is arguably most important: in understanding civil wars’ effects on institutions, technology, and social norms.

Waldmann: Optimal Capital Income Taxation It Is

Robert Waldmann (2008), "Optimal Capital Income Taxation It Is" http://www.economia.uniroma2.it/nuovo/facolta/docenti/curriculum/Robert%20JamesWaldmann.pdf

It is well known that, in standard growth models, the optimal tax on capital income goes to zero asymptotically. Even some serious economists (cough Glenn Hubbard cough) seem to have decided this means that capital income taxes should be eliminated right now. However, asymptotically we'll all be dead. One can tell more if one looks at the simplest cases of standard growth models: an aK model with optimizing consumers who have logarithmic utility or a Cass-Koopmans model with Cobb-Douglas production and logarithmic utility (OK that was wonky but it's about assumptions so I have to be honest).

Consider such an economy in which the distribution of wealth is unequal at time 0. A utilitarian state would want to redistributed income. The first best way to do this is with a lump sum transfer. Let's rule that out by setting an upper limit on the tax on wealth (or an upper limit on the tax on capital income). What is the best policy?

The best policy would be to tax capital income at the maximum allowed by the assumption and use the revenues to reduce inequality until perfect equality is achieved. After perfect equality is achieved, there is no more reason to tax and taxes are zero. Thus, as noted above, the optimal tax goes to zero in the long run. The reason is that it is optimal to tax as much as is allowed by assumption so long as there is any reason at all to tax. Then stop.

A simple-minded application of the model to policy would suggest that we should tax as much as we can until everyone is perfectly equal. Now the model is not the world and this would be a terrible policy. However, the argument for roughly the opposite policy is based on the same silly model plus totally turning its implications upside down by pretending that time has already gone to infinity.

The assumption of logarithmic utility is not at all innocent. It makes a huge difference. A more general assumption (which is standard in the literature) is constant elasticity of substitution utility. In this case the optimal policy depends on the intertemporal elasticity of substitution of consumption and on whether the state can pre-commit to a policy that it would like to change later if it could.

If the state can't precommit, the implications are just like those for logarithmic utility described above: tax as much as possible so long as there is any reason to tax at all, then stop when everyone is perfectly equal.

With precommitment, if the intertemporal elasticity of substitution is less than one (as are all empirical estimates of said elasticity) the result is to tax even more, that is to tax as much as possible until the initially rich are as poor as the initially poor, then tax them some more.

These conclusions follow from analysis using standard techniques of the simplest case of the standard model. I think that they are not noted in the literature. I conclude, as always, that to the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says "Mathematical analysis which you wouldn't understand of my model shows that X is a bad policy" you should hear "I don't like X."

Acemoglu, Johnson, Querubín, and Robinson" Central bank independence: failures, successes and the 'seesaw effect'

Daron Acemoglu, Simon Johnson, Pablo Querubín, and James A Robinson (2008), "Central bank independence: failures, successes and the 'seesaw effect'":

Krugman: Speculation and Signatures

Paul Krugman (2008), "Speculation and Signatures" http://www.princeton.edu/~pkrugman/Speculation%20and%20Signatures.pdf

Eichengreen: The Political Economy of the Smoot-Hawley Tariff

Barry Eichengreen (1986), "The Political Economy of the Smoot-Hawley Tariff" http://www.nber.org/papers/w2001.pdf?new_window=1

Lenin: The Proletarian Revolution and the Renegade Kautsky

Vladimir Lenin (1918), "The Proletarian Revolution and the Renegade Kautsky"

Sabelhaus, Simpson, and Topoleski: Incorporating Longevity Effects into Long-Term Medicare Projections

John Sabelhaus, Michael Simpson, and Julie Topoleski (2008), "Incorporating Longevity Effects into Long-Term Medicare Projections" http://www.cbo.gov/ftpdocs/49xx/doc4996/2004-2.pdf

H. G. Wells: Anticipations

H. G. Wells (1906), Anticipations: Of the Reaction of Mechanical and Scientific Progress upon Human Life and Thought.

Armour and Daly: Retirement Savings and Decision Errors: Lessons from Behavioral Economics

Phil Armour and Mary Daly (2008), :Retirement Savings and Decision Errors: Lessons from Behavioral Economics", FRBSF Economic Letter.

Weitzman: Prices vs. Quantities

Martin L. Weitzman (1974), "Prices vs. Quantities", Review of Economic Studies 41:4 (Oct.), pp. 477-491.

Allen, Bassino, Moll-Murata, and van Zanden: Wages, Prices, and Living Standards in China, Japan, and Europe, 1738-1925

Robert C. Allen, Jean-Pascal Bassino, Christine Moll-Murata, and Jan Luiten van Zanden (2005), "Wages, Prices, and Living Standards in China, Japan, and Europe, 1738-1925" http://www.paris-jourdan.ens.fr/ydepot/actua/JOURNE/2007_05_25/MAX07HIS.pdf

Allen: The Great Divergence: Wages and Prices in Europe from the Middle Ages to the First World War

Robert Allen (1998), "The Great Divergence: Wages and Prices in Europe from the Middle Ages to the First World War" http://www.econ.ubc.ca/dp9812.pdf

Summers: America needs to make a new case for trade

Lawrence Summers (2008), "America Needs to Make a New Case for Trade http://www.ft.com/cms/s/0/0c185e3a-1478-11dd-a741-0000779fd2ac.html

Summers: A strategy to promote healthy globalisation

Lawrence Summers 2008), "A strategy to promote healthy globalisation" http://www.ft.com/cms/s/0/999160e6-1a03-11dd-ba02-0000779fd2ac.html

Rodrik: Doing Growth Diagnostics Well

Dani Rodrik (2007), "Doing Growth Diagnostics Well"

Rodrik: Rethinking Growth Policies in the Developing World

Dani Rodrik (2004), "Rethinking Growth Policies in the Developing World" http://ksghome.harvard.edu/~drodrik/luca_d_agliano_lecture_oct_2004.pdf

Prebisch: Commercial Policy in the Underdeveloped Countries

Raul Prebisch (1959), "Commercial Policy in the Underdeveloped Countries," American Economic Review 4:2 (May), pp. 251-273 http://www.jstor.org/sici?sici=0002-8282(195905)49%3A2%3C251%3ACPITUC%3E2.0.CO%3B2-4http://www.jstor.org/stable/1816120

Botticini: The Price of Love: Marriage Markets and Intergenerational Transfers in Comparative Perspective

Maristella Botticini (2008), "The Price of Love: Marriage Markets and Intergenerational Transfers in Comparative Perspective" http://emlab.berkeley.edu/users/webfac/cromer/e211_sp08/price_of_love.pdf

Brad Setser: Be Careful -- Real Export Growth Looks to Have Slowed

RGE - Be careful -- real export growth looks to have slowed:

Cowles Foundation for Research in Economics Monographs, 1934-1981

Cowles Foundation for Research in Economics: Monographs, 1934-1981:

Ian Sample: The Antikythera Mechanism

Mysteries of computer from 65BC are solved | Science | The Guardian: Ian Sample, science correspondent: A 2,000-year-old mechanical computer salvaged from a Roman shipwreck has astounded scientists who have finally unravelled the secrets of how the sophisticated device works.

The machine was lost among cargo in 65BC when the ship carrying it sank in 42m of water off the coast of the Greek island of Antikythera. By chance, in 1900, a sponge diver called Elias Stadiatos discovered the wreck and recovered statues and other artifacts from the site.

The machine first came to light when an archaeologist working on the recovered objects noticed that a lump of rock had a gear wheel embedded in it. Closer inspection of material brought up from the stricken ship subsequently revealed 80 pieces of gear wheels, dials, clock-like hands and a wooden and bronze casing bearing ancient Greek inscriptions.

Since its discovery, scientists have been trying to reconstruct the device, which is now known to be an astronomical calendar capable of tracking with remarkable precision the position of the sun, several heavenly bodies and the phases of the moon. Experts believe it to be the earliest-known device to use gear wheels and by far the most sophisticated object to be found from the ancient and medieval periods.

Using modern computer x-ray tomography and high resolution surface scanning, a team led by Mike Edmunds and Tony Freeth at Cardiff University peered inside fragments of the crust-encased mechanism and read the faintest inscriptions that once covered the outer casing of the machine. Detailed imaging of the mechanism suggests it dates back to 150-100 BC and had 37 gear wheels enabling it to follow the movements of the moon and the sun through the zodiac, predict eclipses and even recreate the irregular orbit of the moon. The motion, known as the first lunar anomaly, was developed by the astronomer Hipparcus of Rhodes in the 2nd century BC, and he may have been consulted in the machine's construction, the scientists speculate.

Remarkably, scans showed the device uses a differential gear, which was previously believed to have been invented in the 16th century. The level of miniaturisation and complexity of its parts is comparable to that of 18th century clocks.

Some researchers believe the machine, known as the Antikythera Mechanism, may have been among other treasure looted from Rhodes that was en route to Rome for a celebration staged by Julius Caesar.

One of the remaining mysteries is why the Greek technology invented for the machine seemed to disappear. No other civilisation is believed to have created anything as complex for another 1,000 years. One explanation could be that bronze was often recycled in the period the device was made, so many artefacts from that time have long ago been melted down and erased from the archaelogical record. The fateful sinking of the ship carrying the Antikythera Mechanism may have inadvertently preserved it. "This device is extraordinary, the only thing of its kind," said Professor Edmunds. "The astronomy is exactly right ... in terms of historic and scarcity value, I have to regard this mechanism as being more valuable than the Mona Lisa." The research, which appears in the journal Nature today, was carried out with scientists at the National Archaeological Museum of Athens where the mechanism is held and the universities of Athens and Thessaloniki.

Smith: Inspecting the Mechanism Exactly: A Closed-form Solution to a Stochastic Growth Model

William T. Smith (2007), "Inspecting the Mechanism Exactly: A Closed-form Solution to a Stochastic Growth Model" http://www.bepress.com/bejm/vol7/iss1/art30

Duarte: Frank P. Ramsey: A Cambridge Economist

Pedro Garcia Duarte (2007), "Frank P. Ramsey: A Cambridge Economist" http://www.gmu.edu/centers/publicchoice/SummerInstitute/papers07/PGDuarte.pdf

Smith: A Closed Form Solution to the Ramsey Model

William T. Smith (2006), "A Closed Form Solution to the Ramsey Model" http://www.bepress.com/cgi/viewcontent.cgi?article=1356&context=bejm

Baker, DeLong, and Krugman: Asset Returns and Economic Growth"

Dean Baker, J. Bradford DeLong, and Paul Krugman (2005), "Asset Returns and Economic Growth" http://www.j-bradford-delong.net/movable_type/bdk-bpea.pdf

Eichengreen (1997): The Baring Crisis in a Mexican Mirror

Barry Eichengreen (1997), "The Baring Crisis in a Mexican Mirror" http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1031&context=iber/cider:

Conventional wisdom has it that the Mexican crisis of 1994-5 was "the first financial crisis of the 21st century." In this paper I argue that it may be better understood as the last financial crisis of the 19th. The crisis in Mexico exhibits striking similarities to the Baring Crisis of 1890, an event that did much to shape modern opinion about the causes and consequences of financial crises and the role for official management.

Parallels between the two episodes are extensive.... Mexico was the benchmark for investors in emerging markets in the 1990s (it was the single largest borrower, and the spreads it commanded set the floor for other borrowers), Argentina, the country whose financial difficulties ignited the Baring Crisis, was commended to investors as "The United States of South America"... the single most important destination for British capital outside the United States and the British Empire... the wheels of international finance were greased by declining interest rates worldwide, associated with Goschen's debt conversion in the 1880s and recession- induced cuts in interest rates by the Federal Reserve in the 1990s. In both cases investors who had been slow to join the bandwagon climbed on board in the final stages of the boom.

While foreign borrowing was portrayed as financing investment in productive capacity, in both cases capital inflows fueled rising levels of consumption. Foreign capital flowed through the banking system, and bank lending financed purchases of luxury imports as well as capital goods. Governments failed to boost their savings to offset dissaving by the private sector. In both cases powerful opposition existed to the government in power, leaving officials reluctant to tighten monetary and fiscal policy for fear of alienating their core constituencies. Hence, they did little to damp down the impact on the economy of international capital flows.

But increased demand did not automatically elicit increased supply. Investment in capacity took time to translate into improved export performance.... Political shocks (strikes and an incipient coup in Buenos Aires in 1889-90, the Chiapas revolt and Colosio assassination in 1994) then raised doubts about the ability of the government to carry out adjustment. Better-informed investors grew wary significantly in advance of the crisis.

The crisis itself drove the Argentine government, like the Mexican government after it, to the brink of default. The fallout destabilized the banking system. It provoked a major recession. And it spilled over to other countries. In 1995 the Tequila Effect was felt in Argentina, Brazil, Thailand and Hong Kong. In the wake of the Baring Crisis, interest rates rose in Brazil, Uruguay, Venezuela and Turkey. Countries as far afield as Australia and New Zealand found it difficult to access external finance....

At the same time there are important differences.... Monetary and fiscal excesses were more clearly evident in Argentina in the 1880s than in Mexico in the 1990s.... In 1995 the Clinton Administration and the IMF saw the need to help Mexico avert a suspension of debt-service... in 1994 there was no single financial institution as exposed as Baring Brothers. In 1890 the fear was for the stability of financial markets in the First World, not the Third. Where the U.S. government's first reaction in 1994 was to assemble financial aid for Mexico, in 1890 the Bank of England and the British Government arranged a rescue fund for Baring Brothers, not for Argentina....

Where the Bank of England could make arrangements with other financial institutions before news of Baring's difficulties became public, the 1995 crisis was a very public affair....

In a sense, then, the Mexican crisis is both the last financial crisis of the 19th century and the first financial crisis of the 21st. Its implications resemble those of the Baring Crisis.... But today's international financial today being even more nimble and decentralized than that of the 1880s, it anticipates the kind of crises that will become increasingly prevalent in the 21st century....

Information on the recent Mexican episode is abundant, and interpretations abound. Hence, I assume that the reader is familiar with the outlines of the Mexican crisis. I concentrate mainly on Argentina in the 1880s, providing just as much information on the Mexican crisis as is needed to place the comparison in relief...

Goldstein: The Subprime and Credit Crisis

Morris Goldstein (2008), "The Subprime and Credit Crisis" http://www.petersoninstitute.org/publications/papers/goldstein0408.pdf