The Growing US Fiscal Gap
The United States has a huge long-term fiscal gap, perhaps with a present value
as great as $74 trillion. The US may thus be unable to continue meeting its
current spending commitments without eventually enacting huge tax increases.
The tax cut enacted in 2001 may have increased the fiscal gap by about $13 trillion,
but the main cause of the gap is increasing life expectancy, which raises the cost
of Social Security and Medicare. While the fiscal gap can in theory be eliminated
at the stroke of a pen by simply changing stated policy, in practice this could lead
to serious disruption of people’s expectations. In addition, the fiscal gap may
impair future generations’ opportunity to take full advantage of technological
advances (such as in treating cancer) that have the potential to make their lives
significantly better than ours.
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The Disappearing MasterpieceA quantitative analysis of the illustrations in art history textbooks reveals that the
most important modern American painters—including Pollock, de Kooning, and
Warhol—failed to produce individual paintings as famous as the masterpieces of
some major French modern artists, such as Manet, Gauguin, and Seurat. Yet art
historians do not consider the American artists to be less important and less innovative
than their French predecessors. The absence of American masterpieces
instead appears to be a consequence of market conditions, as changes over time
in the primary methods of showing and selling fine art effectively eliminated the
incentive for artists to produce important individual works. The study of markets
is essential to a full understanding of the development of modern art.
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The UK’s Achievement of Economic StabilityThe UK achieved a remarkable degree of macro-economic stability in the 1990s.
Contrary to expectations when the pound was expelled from the European
exchange rate mechanism in September 1992, over the next ten years inflation
was kept almost exactly on target and its volatility declined by over 90 per cent
compared with the previous 20 years. Stability was achieved when the official aim
was to balance the budget and major industries were being de-nationalised,
contradicting claims that Keynesian policies are needed.
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Ready to Join the EU?This paper presents a new set of indicators concerning the status of economic
reform in the candidate countries for the enlargement of the European Union
which is scheduled for 2004. After an overview of indicators of institutional
development, macroeconomic policy and trade policy, a composite index is
derived. It turns out that the ranking of the candidate countries according to the
composite index diverges from the ranking provided in the progress reports of
the European Commission.
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Continuities and Discontinuities in Global DevelopmentMuch literature normalises a ‘North Atlantic’ pattern of development, and sees a
regionally specific ‘East Asian’ path emerging relatively recently. However,
development patterns in core regions of Europe and East Asia were surprisingly
similar until almost 1800; Europe’s subsequent divergence was shaped by
exceptional resource bonanzas. East Asian growth has been less resourceintensive,
and more continuous with pre-1800 patterns. Since 1978, ‘East Asian’
patterns again characterise coastal China, but China’s interior poses greater
challenges; current interest in more resource-intensive, state-driven development
strategies for those regions is thus unsurprising, but environmentally and socially
risky.
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A Decade of Trade Reforms in IndiaThis paper summarises recent trade reforms in India and documents the extent
to which the country has integrated with the global trading system. The paper
argues that India has made important strides since the initiation of reforms in
1991. Although it lags significantly behind most of East Asia in terms of
manufacturing exports, as part of India’s newfound global orientation, trade in
services has taken on a key role, constituting over a quarter of India’s total
exports in the last few years. Within the services sector, the Information and
Communications Technologies sector is of particular relevance.
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Labour Standards and International TradeCan a case be made for the imposition of international minimum labour
standards? And if so, on what grounds? The authors systematically present the
existing theoretical and empirical arguments for and against introducing minimum
labour standards on the international level, and discuss whether trade sanctions
are the instrument of choice to improve labour standards around the world.
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More Aid—Making It Work for the PoorThis paper highlights the economic challenges that would be associated with a
successful effort by industrial countries to meet the goal of devoting 0.7 percent
of their GNP to official development assistance (ODA) to help poor countries. To
help achieve the Millennium Development Goals, enhanced ODA must be as
productive as possible. In weighing the distribution of aid among countries, it is
necessary to limit potentially adverse ‘real transfer effects’. A multi-pronged
approach to ODA is recommended that includes the use of trust funds and the
financing of global public goods, in addition to direct bilateral transfers.
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Should We Be Globaphobic About Globalisation? Author: An interview with introduction by Brian Snowdon, December 2002
Dani Rodrik is best known for his work on international economics, trade policy,
the institutional foundations of economic development, and the political
economy of economic policy reform. Much of his recent research has been
concerned with the limits and consequences of international economic
integration (globalisation). In this interview, Professor Rodrik gives his views on
several important contemporary issues relating to the international economy.
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Slobodan Milosevic and the Fire of NationalismThis paper is an economist’s attempt to understand the behaviour of dictators
with special reference to the Milosevic regime in Serbia. The author focuses on
nationalism, ethnic cleansing and war, especially the most recent war with
NATO. The basic argument is simple. First, like any dictator, Milosevic needed
support in order to survive in office. His provocative and warlike actions towards other groups are best understood, not as the latest round in a centuries-old tradition of ethnic fighting, but as the attempt of a competitive politician to survive in a situation where the old basis of power had collapsed. Second, in attempting to survive the wave of democratization that swept Eastern Europe after 1989, Milosevic played a wild card—the nationalist card. Nationalism can be wild because, under some circumstances, it is contagious. Especially when combined with the security dilemma, it can spread uncontrollably. Ethnic cleansing and war are seen in this light as neither deliberate, coldly planned strategies of brutal repression, nor the results of complete miscalculation, but the results of a process in which the leadership of the regime was reacting to events which it may have set in motion, but did not entirely control.
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Regulating Tobacco in the United StatesThere has been a dramatic turn of events against the tobacco industry in the past
few years, raising the question of the appropriate future path for smoking policy
in the US. This paper discusses the theory and evidence on regulation of
smoking. The author begins by reviewing the background on this industry. He
then turns to a discussion of the motivations for regulating smoking. He argues
that the available evidence suggests that we move from the traditional model,
which ties regulation to costs external to the smoker, to a new framework where
regulation is related to the internal costs of smoking (the damage the smoker
does to him- or herself). The paper reviews the evidence on the effects of
existing regulations. It concludes with a discussion of future policy directions.
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The Quest for StabilityThe UK seems to be enjoying a golden age of macroeconomic policy-making.
Growth is steady; inflation is low and stable, and unemployment is low. After
years of trying to achieve economic stability we seem to have found the answer.
This paper explores the history of policy-making from the late 1950s. For many
years the presumption was that active demand management could be directed at
achieving a desirable (low) level of unemployment. Pursuit of that policy helped
produce the disasters of 1975 and brought the recognition of supply-side
constraints. Progress has been uneven but the system set in place after 1992 and
the move, four and a half years later, to the establishment of the Bank of
England’s Monetary Policy Committee have produced an effective and highly
successful system of policy-making. Ironically, stability of output, and a low level of unemployment, have been achieved when they have ceased to be explicit
objectives of policy.
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The Case for Congestion ChargingCar use has grown significantly in the UK in recent years, raising concerns about pollution and congestion. Although existing fiscal measures have been effective in tackling the former, the UK now has the worst traffic congestion in Europe. The economic costs of congestion are considerable, and motorists are not covering the external costs of the congestion they cause. Although local charging schemes are set to be introduced, local authorities first need to implement a daunting list of requisites. The paper argues that there is more economic merit in introducing a nation-wide system of congestion charging. Congestion would be cut by 44% and overall traffic levels by 5%. Importantly, the scheme would not increase the overall tax burden on motorists.
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Japan’s Monetary and Economic PolicyJapan has gone from very successful policies that promoted growth without
inflation to a long period of slow growth, recessions and deflation. The Bank of
Japan’s policies are a major reason for deflation. Although the Bank has purchased foreign exchange, it counteracts the inflationary effects of its purchases via sterilization. This forces deflation to continue. Currently, there is a ‘dialogue of the deaf’. The government wants faster growth but does not reform the banking system; the Bank makes bank reform a condition for ending deflationary policies.
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The Puzzle of the Harmonious Stock PricesA peculiar pattern is evident across the stock markets of different countries. In emerging markets, such as Peru and China, all the stocks in the country tend to rise and fall together in the course of ordinary trading. But in developed
countries, such as Denmark and Canada, stocks move independently. What
seems to determine how independently a country’s stock prices move is not the
size of its market, the diversification of its economy, the stability of its
macroeconomic policy or factors relating to the behaviour of individual firms.
Rather, stock prices move more independently in countries that are less corrupt.
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James Tobin, 1918–2002 Author: An interview with introduction by Brian Snowdon & Howard Vane, September 2002
Professor James Tobin, who died on 11 March 2002, was possibly the most eminent
of the world’s ‘Keynesian’ economists. Described by Nobel Laureate Paul Samuelson
as “the archetype of a late-twentieth century American scholar”, Tobin was
without doubt one of the most influential economists of his time who inspired a
whole generation of students. In this interview, Professor Tobin discusses the
progress and development of economics in the second half of the twentieth century.
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The Life Cycles of Modern ArtistsThere have been two very different life cycles for great modern artists: some
have made their major contributions early in their careers, while others have
produced their best work later in their lives. These patterns have been associated
with different artistic goals and working methods: artists who peak late are
motivated by aesthetic considerations and work by trial and error, whereas artists
who peak early are motivated by conceptual concerns and plan their work in
advance. This paper applies this analysis to the careers of the leading members
from the two generations of painters who made New York the center of the art
world in the 1950s and ‘60s. The results not only yield a new understanding of
the life cycles of creative individuals, but also provide new insights into the
rationale behind the prices paid for works of art at auction.
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Cycles of SilverAbsent a workable definition of the term ‘globalization’, debates today lack
intellectual rigor. Most consider globalization a 20th-century (even post-1945)
phenomenon. In fact, globalization was born when Manila was founded as a
Spanish entrepôt in 1571. Connections across the Pacific Ocean (one third of
Earth’s surface area) finally linked Asia with the Americas (about another third of
the globe); American linkages with the Afro-Eurasian ‘Old World’ (approximately
one third of Earth’s surface) had previously existed since 1492. Immense demand
for silver in China, the world’s dominant economy, induced global connections.
Europeans were middlemen. Multi-century commercial, epidemiological,
ecological, and demographic interactions were unleashed at a planetary level.
These historical forces heavily influence global relations today.
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Can Africa Catch Up?The trend towards globalization of the last few decades has been manifested in
the sustained growth of world trade and flows of investment and technology. For
most regions this growing integration has led to rapidly growing per capita
incomes, while Africa has stagnated at the income level achieved about three
decades ago. This paper shows that Africa is marginal to the world economy, but
that the world economy is very important for Africa. In terms of openness to trade
Africa closed up during the 1960s and 1970s, while it has been trying to open up
since then. So far the results in terms of growth have been modest. The question
posed here is whether Africa can effectively link up with the rest of the world
and start a catch-up process, or whether marginalisation is inevitable.
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Towards a Better Climate TreatyThe Kyoto Protocol is an example of how not to construct a treaty. Negotiators began by focusing on the short term, agreeing that the industrialized countries
should cut their emissions of greenhouse gases by about 5% relative to 1990 by
2008–2012. Then they agreed that these cuts should be achieved cost-effectively,
incorporating ‘flexible mechanisms’. Only later did they worry about whether the
treaty created incentives for broad participation and full compliance. Negotiators should have approached things the other way around. They should have begun
by thinking of how they could achieve both broad participation and full
compliance, and of how they could reduce emissions in the long term. Had they
done so, a better, more effective treaty would have been negotiated. In this essay
the author explains why Kyoto is unlikely to succeed in mitigating climate
change. He also proposes an alternative treaty design that is likely to work better.
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Does the Eurozone Face 50 Years of Economic Stagnation?The newly-formed European currency will compete with the dollar to become
the world’s leading currency in the 21st century. Its prospects in this competition will depend partly on the size of the European economy compared with the US economy. This article argues that unprecedented demographic trends will reduce employment and curb output growth in Europe, and so cause the European economy to lose ground relative to the USA. The demographic problems are more serious in Germany and Italy, where a falling population of working age
may lead to declining employment and stagnating output over periods of 20 or
30 years. Against this background the euro will fail to supplant the dollar as the world’s leading currency.
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A Hard Look at the Costs of PeaceThe United States has emerged as a hegemonic, dominant military power exactly
during the period when its military expenditures have grown least. The end of
the Cold War did indeed deliver a huge dividend to its largest beneficiary, the
United States. During this same period, the US economy has also doubled,
fueled by the rapid increases in productivity brought on by the information
economy. These two stylized facts stand in sharp relief to a 40-year period in
which there was a bipolar balance of power and much more modest economic
growth in industrial as well as developing societies. As beneficial as these changes
are, it must be recognized that they also undermine the political and economic
status quo ante. In this article the authors speculate about the importance of
legitimacy in a global political economy dominated by a single major power. New
organizational forms of conflict management may actually be fostered by such a
disequilibrating state of affairs.
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Transport, Access and Economic GrowthTransport and gross domestic product have grown at roughly a one-to-one
relationship in the past. Many decision-makers consider the supply of transport
infrastructure an important ingredient in fostering productivity and economic
growth; some even consider it a prerequisite. This article analyses the various
causal links from transport to economic growth and puts their empirical
significance in perspective. The more important challenge for current transport
policy, however, is found to be that concerning the reverse linkage, i.e.—given a growing economy—how can we develop a transport system that does not then
erode the benefits it created in the first place? Finally, and to that end, a possible future system of sustainable access and mobility service is characterized and policy conclusions are drawn.
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Some Facts about Hedge FundsHedge funds promise investors the best of both worlds: superior performance and
high diversification potential combined into one. This article discusses a number of recent findings that show that the case for hedge funds is less straightforward than often portrayed. A close look at the available hedge fund return data reveal substantial bias which makes interpretation complex. When using traditional performance measures, this will cause investors to overestimate the expected return and underestimate the risk of hedge funds. As a result, they are likely to overinvest in hedge funds.
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The Ups and Downs of Capitalism Author: An interview with introduction by Brian Snowdon, June 2002
Ben Bernanke is a leading macroeconomist who has contributed extensively to
the literature on business cycles, monetary policy, the role of financial markets in economic fluctuations, inflation targeting and the economics of the Great Depression. He is one of the six economists who form the NBER Business Cycle Dating Committee, a group that determines the dates of recessions in the US. In this article/interview Professor Bernanke discusses issues relating to the Great Depression of the 1930s and problems relating to inflation in the latter half of the twentieth century.
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The Promotion TestThe collapse of broadcaster ITV Digital owing £178m to the English Football League will cause, according to the League’s Chairman, the financial failure of
up to fifty of the seventy two clubs. If this were to happen a major restructuring of English football would have to take place, including measures to make sure it could not happen again. This paper examines the underlying causes of the crisis and proposes a simple financial stability rule that would achieve this aim. The rule, which would deny promotion to any team spending over a fixed percentage (e.g. 70%) of its income on player wages, is designed to be a minimum intervention
in the operation of the football market, which has in fact worked well until now. The paper argues that because (a) financial stability is in consumers’ interests, (b) the proposed rule involves minimal intervention, and (c) since competition between clubs would remain intense, the rule would not be subject to competition law challenge.
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"There Will Be Growth in the Spring"Forecasters are currently echoing Chauncey Gardner’s words that “There will be
growth in the spring”. Or certainly by the summer. Are such forecasts credible?
Yes. This article presents evidence that private sector forecasters have done a
reasonably good job of forecasting recoveries in industrialised countries over the 1990s. Since recessions in these countries have tended to last under a year,
forecasting a recovery in the following year has turned out to be a pretty good
bet. However, a few recessions do end up lasting longer than a year: when that
happens, the evidence suggests that forecasters are caught flat-footed.
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Mother Earth: Ally or Adversary?Economic growth requires capital. This article reviews the relationship between
economic growth around the world and six different kinds of capital: real capital; human capital; financial capital; foreign capital; social capital; and natural capital. Economic theory and empirical evidence suggest that domestic and foreign
investment, education, financial maturity, and reasonable equality in the
distribution of income are all good for growth. However, recent theory and
evidence also seem to suggest that natural capital—i.e., abundant natural
resources—may crowd out or impair other types of capital and thus impede
economic growth over long periods.
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The Economics of HappinessEconomists have long considered themselves fortunate that micro-economic
theory needs only be based on relative utility, as it is widely believed that utility is not measurable in absolute terms. But this view is no longer valid. The measurement of happiness constitutes a good approximation to utility. It is shown that research on happiness provides new evidence on important issues of
economic theory and policy. In particular, it is shown how unemployment, income and inflation affect self-reported subjective well-being. The results are
partly in line with accepted economics but partly throw doubt on it. Institutions, such as the type of democracy and the extent of political decentralisation, also systematically affect individual happiness.
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Measuring Information Technology and Productivity in the New EconomyThe growing importance of information technology raises significant challenges
for statisticians and economists. The US national accounts now incorporate
sophisticated measurement tools to capture the rapid rates of technological
change and dramatic improvements in the performance/price ratio of many hightech
assets like computer hardware, software, and telecommunications goods.
These data have been incorporated into traditional sources of growth analyses to
identify the impact of information technology on the US economy. The emerging
consensus is that information technology played a key role in the post-1995
revival of US productivity growth.
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In Praise of Historical Economics Author: An interview with introduction by Brian Snowdon, March 2002
Professor Bradford DeLong is a leading macroeconomist and economic historian,
and is best known for his work on economic growth, business cycles, finance and
issues relating to international economic history and globalisation. However, his interests and publications cover a vast range of issues and, above all, his research and publications demonstrate the important insights that contemporary
economists can gain from a deep knowledge of history. In this article/interview
the author argues that economists, particularly those interested in economic
growth, have much to gain by paying more attention to the literature of ‘historical economics’. In the interview that follows, Professor DeLong gives his views on economists and economic history, the industrial revolution, long-run changes in living standards, economic growth, US economic leadership, depressions, inflation and instability, the ‘new economy’, and the twentieth century.
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Stock Markets and Central BankersThere is a near-consensus that central bankers should focus their attention on the control of inflation, and should accordingly not pay attention to movements in stock markets. This view is reinforced by the continuing influence of the Efficient Markets Hypothesis (EMH), which maintains that financial markets
correctly price firms at all times. The authors assert that this general view is
incorrect. There are strong reasons, both in principle and in practice, to doubt the applicability of the EMH to the valuation of the stock market as a whole.
Indicators of stock market value, such as q, show the market to have been
severely overvalued at the end of the twentieth century. Previous episodes of
overvaluation have been succeeded, both in the US and Japan, by severe
recessions. Such recessions raise the risk of central banks losing control of
inflation, due to liquidity traps; they also impose costs, in terms of output and inflation, which central bankers should take into account. Finally, central bankers already do in any case take these into account, but asymmetrically: only when markets fall, not when they rise.
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Capital ControlsMalaysia’s decision to adopt capital controls in September 1998 reminded the
world that there are alternatives to capital account liberalisation. Unfortunately,
there has been a tendency for both sides in the debate over the capital control
measures to exaggerate their own cases, with little regard for what actually
happened. After examining the cases made, and the actual events surrounding
the imposition of capital controls, the author concludes that the contribution of
the controls to Malaysia’s subsequent recovery cannot be conclusively
established. At worst, the controls may have discouraged not only foreign
portfolio investment, but also foreign direct investment—which may adversely
impact Malaysia’s medium-term competitiveness vis-à-vis the new industrialising
economies of Asia, including China and India.
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Where Do We Stand On Choosing Exchange Rate Regimes in Developing and Emerging Economies?In the midst of a lively debate about international monetary reform at the
beginning of the twenty-first century, there seemed to be a broad consensus
about exchange rate policy in developing and emerging economies; that they
should opt for one of the extremes in the form of either firm fixity or free
flexibility. Intermediate solutions were ruled out. However, dissenting voices
remained and have become more audible. This paper reviews the underlying
theoretical issues and draws on case study experience to see whether clear
conclusions emerge. The investigation shows that the choice of exchange rate
regime continues to involve a careful weighing up of opposing arguments. It may
therefore be unwise for the IMF to adopt the ‘consensus’ view. A more subtle
made-to-measure approach is needed.
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The Economic Impact of the World CupThe World Cup will be the biggest sporting event of 2002, but the Japanese and
Korean governments are also hoping that it will be one of the biggest economic
events of the year. Impact studies by respected economic research institutes
predict a dramatic boost to GDP in both countries. This paper explains how
these forecasts are generated and explains the tendency for such forecasts to be
over-optimistic. The paper concludes with some policy recommendations for
governments and sporting bodies considering hosting such events.
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Letter from Buenos Aires“IMF criminals!” cry the antiglobalists in the wake of Argentina’s descent into
chaos. But the real crime of Argentina’s last ten years was its own supineness in tying its fortunes for so long to the economy of an indifferent superpower, and allowing itself to become the plaything of international bondholders. There are two bogeymen here: a hubristic and arrogant political class which never felt the need to explain to the population the Faustian nature of the dollar peg; and the international credit rating agencies which called Argentina a basket case and sent the cost of its debt soaring, when both its fiscal deficit and its debt ratio were within the limits for entry into the eurozone.
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