Z **Inactive** Worthwhile Economics Read by Brad DeLong

Paul Krugman: America's Senior Moment

Paul Krugman (2005), "America's Senior Moment", The New York Review of Books Volume 52, Number 4 · March 10, 2005

Review of The Coming Generational Storm: What You Need to Know About America's Economic Future by Laurence J. Kotlikoff and Scott Burns MIT Press, 274 pp., $27.95; $16.95 (paper)

America in 2030 will be "a country whose collective population is older than that in Florida today." It will be in "desperate trouble" because the expense of caring for all those old people will cause a fiscal crisis. The nation will be plagued by "political instability, unemployment, labor strikes, high and rising crime rates." That's the picture painted in The Coming Generational Storm by Laurence Kotlikoff and Scott Burns, a book that has helped to feed a rising tide of demographic alarm.

But is that picture right? Yes and no. America does have an aging population, and a responsible government would take preparatory action while the baby boomers are still in the labor force. America also has very serious long-run fiscal problems. But these issues aren't nearly as closely linked as much of the discussion would lead you to believe. The view of demography as destiny is only a half-truth, and in some ways it's as damaging as a lie.

Banerjee and Iyer: History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India

Abhijit Banerjee and Lakshmi Iyer (2004), "History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India"

We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes. Areas in which proprietary rights in in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-Independence period than areas in which these rights were given to the cultivators. These areas also have significantly lower estimates in health and education. We verify that these differences are not driven by omitted variables or endogeneity problems, and argue that they arise because differences in historical institutions lead to very different policy choices.

John H. Cochrane: The Dog That Did Not Bark: A Defense of Return Predictability

John H. Cochrane (2006), "The Dog That Did Not Bark: A Defense of Return Predictability":

If returns are not predictable, dividend growth must be predictable, to generate to observed variation in divided yields. I find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability. Long-horizon return forecasts give the same strong evidence. These tests exploit the negative correlation of return forecasts and dividend-yield autocorrelation across samples, together with sensible upper bounds on dividend-yield autocorrelation, to deliver more powerful statistics. I reconcile my findings with the literature that finds poor power in long-horizon return forecasts, and with the literature that notes the poor out-of-sample R2 of return-forecasting regressions.

Wachter and Warusawitharana: What is the Chance that the Equity Premium Varies over Time?: Evidence from Predictive Regressions

Jessica A. Wachter and Missaka Warusawitharana (2007), "What is the Chance that the Equity Premium Varies over Time?: Evidence from Predictive Regressions":

We examine the evidence on stock return predictability in a Bayesian setting that includes uncertainty about both the existence and strength of predictability. We consider an investor who believes that excess stock returns exhibit predictability with prior probability q < 1. In addition, the investor downweights observed predictability by placing a prior distribution on the R2 of the predictability regression. When we apply our analysis to the dividend-price ratio, we find that even investors who are quite skeptical about the existence and strength of predictability sharply modify their views in favor of predictability when confronted by the evidence. We also find that taking into account the stochastic nature of the regressor (as opposed to the standard model-selection approach of treating the regressor as fixed) can have a large impact on inference about time-varying expected returns.

Marit Rehavi: Sex and Politics: Do Female Legislators Affect State Spending

Marit Rehavi has finished her job market paper:

M. Marit Rehavi (2007), "Sex and Politics: Do Female Legislators Affect State Spending"

Aaron Edlin, Andrew Gelman and Noah Kaplan: Voting as a Rational Choice: Why and How People Vote To Improve the Well-Being of Others

Aaron Edlin, Andrew Gelman and Noah Kaplan (2007), "Voting as a Rational Choice: Why and How People Vote To Improve the Well-Being of Others," Rationality and Society http://rss.sagepub.com/cgi/content/abstract/19/3/293:

For voters with ‘social’ preferences, the expected utility of voting is approximately independent of the size of the electorate, suggesting that rational voter turnouts can be substantial even in large elections. Less important elections are predicted to have lower turnout, but a feedback mechanism keeps turnout at a reasonable level under a wide range of conditions. The main contributions of this paper are: (1) to show how, for an individual with both selfish and social preferences, the social preferences will dominate and make it rational for a typical person to vote even in large elections; (2) to show that rational socially motivated voting has a feedback mechanism that stabilizes turnout at reasonable levels (e.g., 50% of the electorate); (3) to link the rational social-utility model of voter turnout with survey findings on socially motivated vote choice.

Paul Krugman: Will there be a dollar crisis

Paul Krugman (2007), "Will there be a dollar crisis?" >Almost everyone believes that the US current account deficit must eventually end, and that this end will involve dollar depreciation. However, many believe that this depreciation will take place gradually. This paper shows that any process of gradual dollar decline fast enough to prevent the accumulation of implausible levels of US external debt would impose capital losses on investors much larger than they currently expect. As a result, there will at some point have to be a ‘Wile E. Coyote moment’ – a point at which expectations are revised, and the dollar drops sharply. It is much less clear, however, whether this ‘crisis’ will produce macroeconomic problems.

Roman Frydman and Michel D. Goldberg: The Dollar-Euro Exchange Rate and the Limits of Knowledge

Roman Frydman and Michel D. Goldberg (2007), "The Dollar-Euro Exchange Rate and the Limits of Knowledge"

Why do academic economists believe that short-run currency fluctuations are not connected to macroeconomic fundamentals, whereas the individuals most connected to financial markets obviously do? Our answer is that market participants and observers recognize that the relationship between the exchange rate and macroeconomic fundamentals changes at times and in ways that cannot be fully foreseen.... [T]hey recognize that they cannot base their actions solely on a fixed model. Our academic colleagues, by contrast, limit themselves to searching for models in which the exchange rate relationship is either fixed or changes in mechanical ways. They do so because only such models generate “sharp predictions.”... The basic premise of our approach... “imperfect knowledge economics”... [is that] our knowledge and our institutions... change over time. Indeed, capitalist economies provide powerful incentives for individuals to find new ways of thinking about the future and the past. In such a world, it is rather odd for economists to expect that a fixed set of economic fundamentals would matter in exactly the same way for more than 30 years.... It is thus not surprising that academic economists have found that their models forecast exchange rates no better than flipping a coin.... [A] different view emerges once we recognize that, in a world of imperfect knowledge, economic relationships change.... Formal empirical analysis reveals not only that the relationship between exchange rates and macroeconomic fundamentals has been unstable during the modern era of floating currencies, but also that the set of fundamentals that matters has changed from one sub-period to another. This finding may be news to academic macroeconomists, but it is hardly surprising for market participants...

Giancarlo Corsetti: Has the dollar fallen enough?

Giancarlo Corsetti (2007), "Has the dollar fallen enough?"

Oosterlinck and Weidenmier: Did Johnny Reb have a Fighting Chance? A Probabilistic Assessment from European Financial Markets

Kim Oosterlinck and Marc D. Weidenmier (2007), "Did Johnny Reb have a Fighting Chance? A Probabilistic Assessment from European Financial Markets" http://www.ekh.lu.se/ehes/paper/Did%20Johnny%20Reb%20have%20a%20Fighting%20Chance.pdf

Historians have long wondered whether the Southern Confederacy had a realistic chance at winning the American Civil War. We provide some quantitative evidence on this question by introducing a new methodology for estimating the probability of winning a civil war or revolution based on financial market data. Using a unique dataset of Confederate war bonds in Amsterdam, we apply this methodology to estimate the probability of a Southern victory from the summer of 1863 until the end of the war. Our results suggest that European investors gave Johnny Reb approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg. News of the severity of the two rebel defeats led to a sell-off in Confederate bonds. By the end of 1863, the probability of a Southern victory had declined to about 15 percent. Confederate victory prospects generally declined for the remainder of the war. The analysis also suggests that McClellan's possible election as U.S. President on a peace party platform as well as Confederate military victories in 1864 did little to reverse the market's assessment that the South would probably lose the Civil War.