Naked Economics
Page 37
That point comes with several heavy doses of caution. First, we must always make explicit the costs of fiddling with markets, whatever those costs may be. How is the outcome different than it would have been, and who pays? Second, we should take care that these costs fall most heavily on those who enjoy the benefits. Last and most important, we should make sure that one group (such as those of us who think that strip malls are hideously ugly) does not use the political and regulatory process to impose its aesthetic preferences on another group (those who own strip malls and the people who enjoy the cheap and convenient shopping there). That said, there is nothing to stop us from dreaming of a world without strip malls.
Do we really have monetary policy figured out? I asked that question in the first edition of this book, back in 2002. Here is part of the answer: “The Japanese economy—that miracle of the 1980s—remains stubbornly resistant to traditional monetary and fiscal fixes, prompting what the Wall Street Journal has called ‘one of the great economic debates of the age.’”4 Could something similar happen here?
It did, beginning in 2007. That doesn’t make me a genius (as I’ve also predicted that the Cubs will win the World Series on multiple occasions). It does prove that we have not conquered the business cycle (the economic ebb and flow that leads to periodic recessions). We thought we had it tamed, and then the financial crisis nearly took us right off the rails. These swings in the economy take a lot of innocent victims with them.
Ben Bernanke and the Fed seem to have done a lot of things right. What have they done wrong that we don’t know about yet? Remember, Alan Greenspan was a genius (keeping inflation in check) until he wasn’t anymore (because loose money fueled the asset bubbles).
There is a regulatory challenge as well. (The discussions have started, but we’re not anywhere near a solution.) How do we manage the “systemic risk” in an interdependent financial system? The iron law of capitalism is that firms that fail should fail. We did that with Lehman Brothers and it nearly took all of us with them. The global financial system does not look like a textbook model where strong firms thrive in a crisis and weak firms fail; it’s more like a group of mountain climbers tethered together on the edge of a precipice. How do we allow the market to punish wrongdoers without sending all of us spilling down the mountain?
In forty years, will “African tigers” refer to wildlife or to development success stories? Here is an exercise: Find a young child, say age eight or nine, and try to explain to him or her why much of the world lives comfortably, even luxuriously, while millions of people elsewhere on the planet are starving to death and billions more are barely getting by. At some point, the explanation just starts to feel inadequate. Clearly we do not have a silver bullet for economic development. We don’t have one for cancer either, but we haven’t given up. Will the world be significantly less poor in 2050? That answer is not obvious. We can imagine an East Asian scenario in which countries transform themselves in a matter of decades. Or we can imagine a sub-Saharan Africa scenario in which countries stumble from decade to decade without any significant economic growth at all. One scenario will lift billions of people out of poverty and misery; the other won’t.
When we ask whether poor countries will still be poor four decades from now, the question seems distant and abstract, almost as if the answer will be determined by some future alignment of the stars. But when we break that question into its component parts—when we ask about the things that we know will distinguish rich countries from poor countries—then global poverty seems more tractable. Will governments in developing countries create and sustain the kinds of institutions that support a market economy? Will they develop export industries that enable them to break out of the trap of subsistence agriculture—and will the United States open its huge market to those products? Will the rich countries use their technology and resources to fight the diseases that are ravaging the developing world, especially AIDS? Will the family of a baby girl born tomorrow in rural India have an incentive to invest in her human capital?
Can America get its fiscal house back in order? The United States is the world’s largest debtor. We owe Chinese bondholders more than a trillion dollars. We’ve had to borrow heavily to pay our bills for the past decade. The sobering part is that some of our most significant government expenses lie ahead as the Baby Boomers retire and begin to claim Social Security and Medicare. The “peace dividend” at the end of the Cold War lasted about 45 minutes, so we seem stuck with large defense budgets for the foreseeable future. Math is math; every reasonable calculation I’ve seen shows that our fiscal trajectory is unsustainable.
So what will we do about it? U.S. society has developed not merely an aversion to higher taxes, but a palpable hostility. That would be fine if we were willing to trim government to a size that we could fund. But we haven’t done that either.
Think about what that means. Going forward, somehow we have to raise enough revenue to (1) pay for whatever government we choose to have, which we aren’t doing fully now; (2) pay the interest we’ve accumulated on past bills; and (3) pay for the new expenses associated with an aging population and expensive entitlement promises.
That’s going to require serious political leadership and recognition by Americans that the status quo is not an option. Simon Johnson, who had plenty of experience with financial crises as the former chief economist for the International Monetary Fund, has noted, “Overborrowing always ends badly, whether for an individual, a company, or a country.”5 During the first decade of the new millennium, three parties borrowed heavily: consumers, financial firms, and the U.S. government. So far, two have paid a huge price for that leverage. Is there another shoe to drop?
Those are just my questions. My hope is that by now you have more of your own. The remarkable thing about economics is that once you’ve been exposed to the big ideas, they begin to show up everywhere. The sad irony of Econ 101 is that students too often suffer through dull, esoteric lectures while economics is going on all around them. Economics offers insight into wealth, poverty, gender relations, the environment, discrimination, politics—just to name a few of the things we’ve touched upon. How could that possibly not be interesting?
Notes
Introduction
1. Thomas Friedman, “Senseless in Seattle,” New York Times, December 1, 1999.
2. Claudia Goldin and Cecilia Rouse, “Orchestrating Impartiality: The Impact of ‘Blind’ Auditions on Female Musicians,” American Economic Review, September 2000.
3. Charles Himmelberg, Christopher Mayer, and Todd Sinai, “Assessing High House Prices: Bubbles, Fundamentals and Misperceptions,” Journal of Economic Perspectives, vol. 19, no. 4 (Fall 2005).
4. David Brooks, “An Economy of Faith and Trust,” New York Times, January 16, 2009.
CHAPTER 1. THE POWER OF MARKETS
1. M. Douglas Ivester, Remarks to the Economic Club of Chicago, February 25, 1999.
2. Stephen Moore and Julian Simon, The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years, Cato Institute Policy Analysis, No. 364 (Washington, D.C.: Cato Institute, December 15, 1999).
3. Cara Buckley, “A Man Down, a Train Arriving, and a Stranger Makes a Choice,” New York Times, January 3, 2007.
4. Michael Grossman, “Health Economics,” NBER Reporter, Winter 1998/99.
5. “America Then and Now: It’s All in the Numbers,” New York Times, December 31, 2000.
6. “Relieving O’Hare,” The Economist, January 10, 1998.
7. June 21, 2001, p. A1.
8. David Kushner, “The Latest Way to Get Cocaine Out of Colombia? Underwater,” New York Times Sunday Magazine, April 26, 2009.
9. Michael Cooper, “Transit Use Hit Five-Decade High in 2008 as Gas Prices Rose,” New York Times, March 9, 2009.
10. Fernando A. Wilson, Jim Stimpson, and Peter E. Hilsenrath, “Gasoline Prices and Their Relationship to Rising Motorcycle Fatalities, 1990–2007,” American Journal of Public Health, vol. 99, no. 10
(October 2009).
11. Jaime Sneider, “Good Propaganda, Bad Economics,” New York Times, May 16, 2000, p. A31.
12. Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven, Conn.: Yale University Press, 2008).
13. Press release from The Royal Swedish Academy of Sciences, October 9, 2002.
14. Jonathan Gruber, “Smoking’s ‘Internalities,’” Regulation, vol. 25, no. 4 (Winter 2002/2003).
15. Annamaria Lusardi, “The Importance of Financial Literacy,” NBER Reporter: Research Summary, no. 2 (2009).
16. Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985).
CHAPTER 2. INCENTIVES MATTER
1. Costa Rican Embassy, Washington, D.C.
2. Ian Fisher, “Victims of War: The Jungle Gorillas, and Tourism,” New York Times, March 31, 1999.
3. Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon & Schuster, 1998), pp. 216–17.
4. “Paying Teachers More,” The Economist, August 24, 2000.
5. David Stout, “Child Safety Seats to Be Required for Commercial Planes,” New York Times, December 16, 1999, p. A20.
6. Julia Preston, “Mexico’s Political Inversion: The City That Can’t Fix the Air,” New York Times, February 4, 1996, Sect. 4, p. 4.
7. Ibid.; Lucas W. Davis, “The Effect of Driving Restrictions on Air Quality in Mexico City,” Journal of Political Economy, vol. 116, no. 1 (February 2008).
8. “Avoiding Gridlock,” The Economist, February 17, 2003.
9. “Ken’s Coup,” The Economist, March 20, 2003.
10. “How to Pay Bosses,” The Economist, November 16, 2002.
11. Floyd Norris, “Stock Options: Do They Make Bosses Cheat?” New York Times, August 5, 2005.
12. Simon Johnson, “The Quiet Coup,” The Atlantic, May 2009.
13. John Tierney, “A Tale of Two Fisheries,” New York Times Magazine, August 27, 2000, p. 38.
14. “A Rising Tide,” The Economist, September 20, 2008.
15. Dirk Johnson, “Leaving the Farm for the Other Real World,” New York Times, November 7, 1999, p. 3.
16. Virginia Postrel, “The U.S. Tax System Is Discouraging Married Women from Working,” New York Times, November 2, 2000, p. C2.
17. Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic Literature, March 2000.
CHAPTER 3. GOVERNMENT AND THE ECONOMY
1. Donald G. McNeil, Jr., “A Fouled City Puts Its Foot Down, but Carefully,” New York Times, November 9, 1999.
2. “Mum’s the Word,” The Economist, December 5, 1998.
3. “Czechs Puff Away to the Benefit of State Coffers,” United Press International, July 17, 2001.
4. Robert Frank, “Feeling Crash-Resistant in an SUV,” New York Times, May 16, 2000.
5. Katharine Q. Seelye, “Utility Buys Town It Choked, Lock, Stock and Blue Plume,” New York Times, May 13, 2002.
6. “Here’s Hoping: A Survey of Nigeria,” The Economist, January 15, 2000.
7. Blaine Harden, “Angolan Paradox: Oil Wealth Only Adds to Misery,” New York Times, April 9, 2000.
8. Barbara Crossette, “U.N. Says Bad Government Is Often the Cause of Poverty,” New York Times, April 5, 2000, p. A11.
9. John G. Fernald, “Roads to Prosperity? Assessing the Link Between Public Capital and Productivity,” American Economics Review, vol. 89, no. 3 (June 1999), pp. 619–38.
10. Jerry L. Jordan, “How to Keep Growing ‘New Economies,’” Economic Commentary, Federal Reserve Bank of Cleveland, August 15, 2000.
11. Barry Bearak, “In India, the Wheels of Justice Hardly Move,” New York Times, June 1, 2000.
12. Thomas L. Friedman, “I Love D.C.,” New York Times, November 7, 2000, p. A29.
13. Amartya Sen, Development as Freedom (New York: Alfred A. Knopf, 1999).
14. Giacomo Balbinotto Neto, Ana Katarina Campelo, and Everton Nunes da Silva, “The Impact of Presumed Consent Law on Organ Donation: An Empirical Analysis from Quantile Regression for Longitudinal Data,” Berkeley Program in Law & Economics, Paper 050107–2 (2007).
CHAPTER 4. GOVERNMENT AND THE ECONOMY II
1. John Markoff, “CIA Tries Foray into Capitalism,” New York Times, September 29, 1999.
2. March 6, 2001.
3. Jackie Calmes and Louise Story, “In Washington, One Bank Chief Still Holds Sway,” New York Times, January 19, 2009.
4. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1982).
5. Celia W. Dugger, “A Cruel Choice in New Delhi: Jobs vs. a Safer Environment,” New York Times, November 24, 2000.
6. “A Useful Poison,” The Economist, December 14, 2000.
7. “Fighting Malaria,” The Economist, May 1, 2003.
8. “A Useful Poison,” The Economist, December 14, 2000.
9. Gary Becker and Guity Nashat Becker, The Economics of Life (New York: McGraw-Hill, 1996).
10. Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, The Regulation of Entry, NBER Working Paper No. W7892 (National Bureau of Economic Research, September 2000).
11. Geeta Anand, “India’s Colleges Battle a Thicket of Red Tape,” Wall Street Journal, November 13, 2008.
12. Stephen Castle, “Europe Relaxes Rules on Sale of Ugly Fruits and Vegetables,” New York Times, November 13, 2008.
13. Nicholas Lemann, “The Quiet Man: How Dick Cheney Rose to Power,” The New Yorker, May 7, 2001.
14. Bruce Bartlett, “How Supply-Side Economics Trickled Down,” New York Times, April 6, 2007.
15. Greg Mankiw’s blog, March 11, 2007.
16. Rebecca M. Blank, “Fighting Poverty: Lessons from Recent U.S. History,” Journal of Economic Perspectives, vol. 14, no. 2 (Spring 2000).
17. Jerry L. Jordan, “How to Keep Growing ‘New Economies,’” Economic Commentary, Federal Reserve Bank of Cleveland, August 15, 2000.
CHAPTER 5. ECONOMICS OF INFORMATION
1. Gary Becker, The Economics of Discrimination (Chicago: University of Chicago Press, 1971).
2. Harry Holzer, Steven Raphael, and Michael Stoll, “Perceived Criminality, Criminal Background Checks, and the Racial Hiring Practices of Employers,” Journal of Law and Economics, vol. XLIX (October 2006).
3. David Leonhardt, “In Health Reform, a Cancer Offers an Acid Test,” New York Times, July 8, 2009.
4. “Testing Times,” The Economist, October 19, 2000.
5. “Outsourcing: Separate and Lift,” The Economist, September 20, 1997.
6. Geoffrey A. Fowler, “Kind of Blue: In Asia, Elite Offices Show Off with Icy Temperatures,” Wall Street Journal, August 24, 2005.
7. Alan B. Krueger, “Children Smart Enough to Get into Elite Schools May Not Need to Bother,” New York Times, April 27, 2000, p. C2.
8. All of the racial profiling examples come from a provocative article on the subject: Jeffrey Goldberg, “The Color of Suspicion,” New York Times Magazine, June 20, 1999.
CHAPTER 6. PRODUCTIVITY AND HUMAN CAPITAL
1. Brier Dudley, “Gates Wants to Expand Mega-House,” Seattle Times, February 28, 2001.
2. “The Rich Get Richer: A Survey of India’s Economy,” The Economist, June 2, 2001.
3. Evelyn Nieves, “Homeless Defy Cities’ Drives to Move Them,” New York Times, December 7, 1999.
4. “From Boots to Electronics: Shutting Military Bases,” The Economist, June 21, 1997.
5. T. Paul Schultz, “Health and Schooling Investments in Africa,” Journal of Economic Perspectives, vol. 13, no. 3 (Summer 1999), pp. 67–88.
6. Gary Becker, “Economic Evidence on the Value of Education,” Remarks to executives of the Lotus Development Corporation, January 1999.
7. Gary S. Becker, Ryerson Lecture at the University of Chicago, as reprinted in Becker, Human
Capital (Chicago: University of Chicago Press, 1993), p. 21.