conversableeconomist

Summer 2012 Journal of Economic Perspectives

Here is the table of contents for the Summer 2012 issue of my own Journal of Economic Perspectives, with abstracts and links to each article. I\’ll be blogging about some of these articles in more detail in the next week or so. As always, all JEP articles are freely available, going back to 1994, courtesy of the American Economic Association. 
Symposium: Labor Markets and Unemployment

“A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?”
Mary C. Daly, Bart Hobijn, Ayşegül Şahin and Robert G. Valletta
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Abstract: The U.S. unemployment rate has remained stubbornly high since the 2007-2009 recession, leading some observers to conclude that structural rather than cyclical factors are to blame. Relying on a standard job search and matching framework and empirical evidence from a wide array of labor market indicators, we examine whether the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. Our preferred estimate indicates an increase in the natural rate of unemployment of about one percentage point during the recession and its immediate aftermath, putting the current natural rate at around 6 percent. An assessment of the underlying factors responsible for this increase, including labor market mismatch, extended unemployment benefits, and uncertainty about overall economic conditions, implies that only a small fraction is likely to be persistent.

“Who Suffers during Recessions?”
Hilary Hoynes, Douglas L. Miller and Jessamyn Schaller
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Abstract: “In this paper, we examine how business cycles affect labor market outcomes in the United States. We conduct a detailed analysis of how cycles affect outcomes differentially across persons of differing age, education, race, and gender, and we compare the cyclical sensitivity during the Great Recession to that in the early 1980s recession. We present raw tabulations and estimate a state panel data model that leverages variation across U.S. states in the timing and severity of business cycles. We find that the impacts of the Great Recession are not uniform across demographic groups and have been felt most strongly for men, black and Hispanic workers, youth, and low-education workers. These dramatic differences in the cyclicality across demographic groups are remarkably stable across three decades of time and throughout recessionary periods and expansionary periods. For the 2007 recession, these differences are largely explained by differences in exposure to cycles across industry-occupation employment.”

Symposium: Government Debt

“The European Sovereign Debt Crisis”
Philip R. Lane
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Abstract: The origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro. In particular, there was an incomplete understanding of the fragility of a monetary union under crisis conditions, especially in the absence of banking union and other European-level buffer mechanisms. Moreover, the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis. After diagnosing the situation, we consider reforms that might improve the resilience of the euro area to future fiscal shocks.
“Public Debt Overhangs: Advanced-Economy Episodes since 1800”
Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff
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Abstract: We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90 percent for at least five years. Consistent with Reinhart and Rogoff (2010) and most of the more recent research, we find that public debt overhang episodes are associated with lower growth than during other periods. The duration of the average debt overhang episode is perhaps its most striking feature. Among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates, as in eleven of the episodes, interest rates are not materially higher.


Articles

The Economics of Spam
Justin M. Rao and David H. Reiley
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Abstract: We estimate that American firms and consumers experience costs of almost $20 billion annually due to spam. Our figure is more conservative than the $50 billion figure often cited by other authors, and we also note that the figure would be much higher if it were not for private investment in anti-spam technology by firms, which we detail further on. Based on the work of crafty computer scientists who have infiltrated and monitored spammers\’ activity, we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the \”externality ratio\” of external costs to internal benefits for spam is around 100:1. In this paper, we start by describing the history of the market for spam, highlighting the strategic cat-and-mouse game between spammers and email providers. We discuss how the market structure for spamming has evolved from a diffuse network of independent spammers running their own online stores to a highly specialized industry featuring a well-organized network of merchants, spam distributors (botnets), and spammers (or \”advertisers\”). We then put the spam market\’s externality ratio of 100 into context by comparing it to other activities with negative externalities. Lastly, we evaluate various policy proposals designed to solve the spam problem, cautioning that these proposals may err in assuming away the spammers\’ ability to adapt.

“Identifying the Disadvantaged: Official Poverty, Consumption Poverty, and the New Supplemental Poverty Measure”
Bruce D. Meyer and James X. Sullivan
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“We discuss poverty measurement, focusing on two alternatives to the current official measure: consumption poverty, and the Census Bureau\’s new Supplemental Poverty Measure (SPM) that was released for the first time last year. The SPM has advantages over the official poverty measure, including a more defensible adjustment for family size and composition, an expanded definition of the family unit that includes cohabitors, and a definition of income that is conceptually closer to resources available for consumption. The SPM\’s definition of income, though conceptually broader than pre-tax money income, is difficult to implement given available data and their accuracy. Furthermore, income data do not capture consumption out of savings and tangible assets such as houses and cars. A consumption-based measure has similar advantages but fewer disadvantages. We compare those added to and dropped from the poverty rolls by the alternative measures relative to the current official measure. We find that the SPM adds to poverty individuals who are more likely to be college graduates, own a home and a car, live in a larger housing unit, have air conditioning, health insurance, and substantial assets, and have other more favorable characteristics than those who are dropped from poverty. Meanwhile, we find that a consumption measure compared to the official measure or the SPM adds to the poverty rolls individuals who are more disadvantaged than those who are dropped. We decompose the differences between the SPM and official poverty and find that the most problematic aspect of the SPM is the subtraction of medical out-of-pocket expenses from SPM income. Also, because the SPM poverty thresholds change in an odd way over time, it will be hard to determine if changes in poverty are due to changes in income or changes in thresholds. Our results present strong evidence that a consumption-based poverty measure is preferable to both the official income-based poverty measure and to the Supplemental Poverty Measure for determining who are the most disadvantaged.”
“The New Demographic Transition: Most Gains in Life Expectancy Now Realized Late in Life”
Karen N. Eggleston and Victor R. Fuchs
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Abstract: The share of increases in life expectancy realized after age 65 was only about 20 percent at the beginning of the 20th century for the United States and 16 other countries at comparable stages of development; but that share was close to 80 percent by the dawn of the 21st century, and is almost certainly approaching 100 percent asymptotically. This new demographic transition portends a diminished survival effect on working life. For high-income countries at the forefront of the longevity transition, expected lifetime labor force participation as a percent of life expectancy is declining. Innovative policies are needed if societies wish to preserve a positive relationship running from increasing longevity to greater prosperity.

“Groups Make Better Self-Interested Decisions”
Gary Charness and Matthias Sutter
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Abstract: In this paper, we describe what economists have learned about differences between group and individual decision-making. This literature is still young, and in this paper, we will mostly draw on experimental work (mainly in the laboratory) that has compared individual decision-making to group decision-making, and to individual decision-making in situations with salient group membership. The bottom line emerging from economic research on group decision-making is that groups are more likely to make choices that follow standard game-theoretic predictions, while individuals are more likely to be influenced by biases, cognitive limitations, and social considerations. In this sense, groups are generally less \”behavioral\” than individuals. An immediate implication of this result is that individual decisions in isolation cannot necessarily be assumed to be good predictors of the decisions made by groups. More broadly, the evidence casts doubts on traditional approaches that model economic behavior as if individuals were making decisions in isolation.

“Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007”
Kazuo Ueda
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Abstract: As the U.S. economy works through a sluggish recovery several years after the Great Recession technically came to an end in June 2009, it can only look with horror toward Japan\’s experience of two decades of stagnant growth since the early 1990s. In contrast to Japan, U.S. policy authorities responded to the financial crisis since 2007 more quickly. Surely, they learned from Japan\’s experience. I will begin by describing how Japan\’s economic situation unfolded in the early 1990s and offering some comparisons with how the Great Recession unfolded in the U.S. economy. I then turn to the Bank of Japan\’s policy responses to the crisis and again offer some comparisons to the Federal Reserve. I will discuss the use of both the conventional interest rate tool—the federal funds rate in the United States, and the \”call rate\” in Japan—and nonconventional measures of monetary policy and consider their effectiveness in the context of the rest of the financial system.

“The Relationship between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing”
Peter Thompson
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Abstract: The concept of a learning curve for individuals has been around since the beginning of the twentieth century. The idea that an analogous phenomenon might also apply at the level of the organization took longer to emerge, but it had begun to figure prominently in military procurement and scheduling at least a decade before Wright\’s (1936) classic paper providing evidence that the cost of producing an airframe declined as cumulative output increased. Wright (1936) was careful not to describe his empirical results as a learning curve. Of his three proposed three explanations for the relationships he observed between cost and cumulative quantity produced, only one is unambiguously a source of organizational learning; the others are consistent with organizational learning but also with standard static economies of scale. It quickly became apparent that the notion of organizational learning as a by-product of accumulated experience has important consequences for firm strategy. The Boston Consulting Group (BCG) built its consulting business around the concept of what it branded the experience curve, asserting that cost reductions associated with cumulative output applied to all costs, were \”consistently around 20-30% each time accumulated production is doubled, [and] this decline goes on in time without limit\” (Henderson 1968). Today, the negative relationship between unit production costs and cumulative output is one of the best-documented empirical regularities in economics. Nonetheless, the thesis of this paper is that the conceptual transformation of the relationship between cost and cumulative production into an organizational learning curve with profound strategic implications has not been sufficiently supported with direct empirical evidence.


Features

“Recommendations for Further Reading”
Timothy Taylor
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High Government Debt: A Bang or a Whimper?

Watching the travails of the euro area in the last few years, it seems as if the negative consequences of high government debt are likely manifest themselves with a bang: that is, a scenario in which investors fear that the debt will not be repaid, and thus begin demanding much higher interest rates for being willing to hold the debt, which then makes it impossible for the government to repay. Rounds of financial panic alternating with recrimination follow, while the economy of the country flounders. In a roundabout way, this scenario is oddly comforting for Americans, because there is no sign in the financial markets (and remember, financial markets look toward future interest rates, not just current rates ) that U.S. Treasury debt is anywhere near to experiencing a surge in its perceived riskiness.

But in the Summer 2012 issue of my own Journal of Economic Perspectives, Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff offer a different scenario in \”Public Debt Overhangs: Advanced-Economy Episodes since 1800.\” They argue that very high levels of government debt can also lead to a debt-without-drama situation in which interest rates rise little or not at all, and no deep financial crisis occurs–but the economy nonetheless suffers a prolonged slowdown in its long-term growth rate. 

They begin by collecting the available data on advanced economies from 1800 to 2011, and found 26 situations in which the ratio of gross government debt/GDP in a certain country exceeded 90% for at least five years. U.S. government debt passed the gross debt/GDP ratio in 2010, but because it has not remained in that zone for five years, the current U.S. debt experience is not included in their group of 26 examples. They point out many patterns in this data, but here, I would emphasize three:

  • When the government debt/GDP ratio climbs above 90%, it tends to remain there for awhile. They find only a few examples where the 90% ratio was reached that lasted less than five years–mainly cases of wartime debts that declined quickly after the war. As they note: \”the 26 episodes of public debt overhang in our sample had an average duration of 23 years.\” Some countries had multiple lengthy episodes of high government debt. \”For example, since 1848 (when the public debt data is available), Greece leads the way with 56 percent of the debt/GDP ratio observations above 90 percent.\”
  • \”However, we find that countries with a public debt overhang by no means always experience either a sharp rise in real interest rates or difficulties in gaining access to capital markets. Indeed, in 11 of the 26 cases where public debt was above the 90 percent debt/GDP threshold, real interest rates were either lower, or about the same, as during the lower debt/GDP years.\”
  • \”Consistent with a small but growing body of research, we find that the vast majority of high debt episodes—23 of the 26— coincide with substantially slower growth. On average across individual countries, debt/GDP levels above 90 percent are associated with an average annual growth rate 1.2 percent lower than in periods with debt below 90 percent debt; the average annual levels are 2.3 percent during the periods of exceptionally high debt versus 3.5 percent otherwise.\” The cases of high debt/GDP ratios and fast growth are typically cases of a bounceback from postwar rebuilding.

In discussing how government debt might lead to slower growth, there is a challenging problem of determining cause and effect. It is possible that high government debt leads to reduced growth, perhaps by leading to lower levels of domestic investment as government borrowing soaks up the available financial capital. (The authors do not have long-term data on investment levels to test this hypothesis.) But it is also possible that a country with slow economic growth might find it easier to build up excessive government debt and harder to muster the economic resources or political decision-making to reduce that debt. In all of these scenarios, high government debt and slow growth accompany each other–but which is the cause and which is the effect?

Reinhart, Reinhart, and Rogoff cite a number of studies using different groups of countries over different time frames, along with statistical approaches that seek to clarify the question of cause and effect (for example, instrumental variables, generalized method of moments estimation, measuring growth with five-year averages that are determined by other variables and thus not subject to feedback effects, fitting data to an endogenous growth model, and the like). They find:

 \”We would not claim that the cause-and-effect problems involved in determining how public debt overhang affects economic growth have been definitively addressed. But the balance of the existing evidence certainly suggests that public debt above a certain threshold leads to a rate of economic growth that is perhaps 1 percentage point slower per year. In addition, the 26 episodes of public debt overhang in our sample had an average duration of 23 years, so the cumulative effect of annual growth being 1 percentage point slower would be a GDP that is roughly one-fourth lower at the end of the period. This debt-without-drama scenario is reminiscent for us of T.S. Eliot’s (1925) lines in “The Hollow Men”: “ This is the way the world ends/Not with a bang but a whimper.” Last but not least, those who are inclined to the belief that slow growth is more likely to be causing high debt, rather than vice versa, need to better reconcile their beliefs with the apparent nonlinearity of the relationship, in which correlation is relatively low at low levels of debt but rises markedly when debt/GDP ratios exceed the 90 percent threshold. Overall, the general thrust of the evidence is that the cumulative economic losses from a sustained public debt overhang can be extremely large compared with the level of output that would otherwise have occurred, even when these economic losses do not manifest themselves as a financial crisis or a recession. …\”

\”This paper should not be interpreted as a manifesto for rapid public debt deleveraging exclusively via fiscal austerity in an environment of high unemployment. Our review of historical experience also highlights that, apart from outcomes of full or selective default on public debt, there are other strategies to address public debt overhang including debt restructuring and a plethora of debt conversions (voluntary and otherwise). The pathway to containing and reducing public debt will require a change that is sustained over the middle and the long term. However, the evidence, as we read it, casts doubt on the view that soaring government debt does not matter when markets (and official players, notably central banks) seem willing to absorb it at low interest rates—as is the case for now.\”