The NBER Reporter 2008 Number 4: Conferences

NBER's 23rd Tax Policy and the Economy Conference Held in Washington
The Great Inflation Conference
American Universities in a Global Market
Europe and the Euro
Understanding Long-Run Economic Growth: A Conference Honoring the Contributions of Kenneth Sokoloff
Microeconomics, Efficiency, and Welfare: Lessons for Latin America
Economic Aspects of Obesity

NBER's 23rd Tax Policy and the Economy Conference Held in Washington

The NBER's 23rd Conference on Tax Policy and the Economy took place at the National Press Club in Washington on September 25. NBER Research Associate Jeffrey R. Brown of the University of Illinois at Urbana-Champaign and NBER President James M. Poterba of MIT organized this year's meeting. The following papers were discussed:

Leora Friedberg, University of Virginia and NBER, and Anthony Webb, Boston College, "New Evidence on the Labor Supply Effects of the Social Security Earnings Test"

Jeffrey R. Brown and Don Fullerton, University of Illinois and NBER, and Julia L. Coronado, Barclays Global Investors, "Is Social Security Part of the Social Safety Net?"

Rosanne Altshuler, Rutgers University; Alan J. Auerbach, University of California, Berkeley and NBER; and Michael Cooper and Matthew Knittel, U.S. Department of Treasury, "Understanding U.S. Corporate Tax Losses"

James R. Hines, Jr., University of Michigan and NBER, and Lawrence H. Summers, Harvard University and NBER, "How Globalization Affects Tax Design"

A. Abigail Payne, McMaster University, "Empirical Analysis of Crowd-Out"

Friedberg and Webb investigate the impact on labor supply of changes in the Social Security earnings test in 1996 and 2000. They highlight how inertia in labor supply choices can influence the responses to policy changes in two ways: First, they show that taking account of previous employment status is important in estimating responses to any current earnings-test changes. Second, they test the effect of both actual and anticipated earnings-test parameters that cohorts faced at earlier ages. This approach demonstrates that both past and anticipated future rules can influence current employment and earnings. Thus, Friedberg and Webb identify an impact of earnings test changes on employment not only contemporaneously for those at the ages directly affected, but also for those at younger ages and in the years that follow the direct change. Finally, the researchers show that earnings-test changes initiated in 1996, like the changes in 2000 that have been studied by others, affected labor supply. Overall, Friedberg and Webb predict that the elimination of the earnings test in 2000 raised employment among Health and Retirement Study respondents by around 2 percentage points at ages 66 to 69 and 3.5 points at age 65. These gains persisted as exposed cohorts aged and were also observed at younger ages because of the shock to anticipated earnings-test rules.

Expanding on earlier work, Brown and his co-authors develop a large sample of individuals born at different times, construct an entire lifetime earnings history for each individual, and then develop several measures by which to classify each individual's lifetime economic status. Then, they calculate each individual's Social Security taxes and retirement benefits, and use several measures of the impact of the Social Security retirement program on "the poor." Their four major findings are: first, as the definition of income becomes more comprehensive, Social Security's retirement program becomes, overall, less progressive. Indeed, by using "potential" labor earnings (defined as an individual's labor endowment multiplied by the individual's wage rate) at the household level rather than actual earnings at the individual level, the researchers find that Social Security has virtually no effect on overall inequality. Second, this result is driven largely by the lack of redistribution across the middle and upper part of the income distribution, so it masks some positive net transfers to the bottom of the lifetime-income distribution. Third, in cases where redistribution does occur, it is not targeted efficiently: many high-income households receive positive net transfers, while many low-income households pay net taxes. Finally, the progressivity of Social Security changes over time because of changing labor force patterns and other demographic patterns, but the direction of these changes depends on the income concept used to classify someone as "poor." Specifically, when comparing individuals in pre-baby boomer cohorts to baby boomers, the authors find that Social Security is becoming slightly less redistributive when measured by individual income and slightly more redistributive when measured by household income.

Recent data on corporate tax losses present a puzzle: the ratio of losses to positive income was much higher around the recession of 2001 than in earlier recessions, even those of greater severity. Using a comprehensive sample of U.S. corporate tax returns for the period 1982-2005, Altshuler and her co-authors explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of stock options in compensation packages beginning in the 1990s and of recent temporary tax provisions that might have had important effects on taxable income. They find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns, or an increase in the gap between corporate profits subject to tax and corporate profits as measured by the national income accounts. This analysis also suggests that the increasing importance of S corporations may help to explain the recent experience within the C corporate sector, because S corporations have exhibited a different pattern of losses in recent years. However, the researchers can identify no simple explanation for the differing experience of C and S corporations. Their investigation raises new puzzles about why rates of return of C corporations declined so much early in the decade, and why the incidence of losses among C and S corporations has diverged.

Hines and Summers suggest that globalization increases citizens' demand for government services while simultaneously making it more difficult to raise revenue because of the greater international mobility of economic activities. In essence, the greater mobility of factors of production means that even large countries like the United States are becoming more like small open economies in terms of the responsiveness of the tax base to changes in tax rates. The researchers document that smaller countries tend to rely more heavily on taxes on goods, services, and international trade than do larger countries, noting in particular the growing popularity of value-added taxes on the international scene. Their work also highlights the fact that the United States taxes both personal and corporate income at high rates relative to other countries, and that the efficiency costs of this type of taxation will continue to grow relative to other forms of taxation as the world economy becomes increasingly integrated.

When governments introduce programs, or funding for initiatives that are partially provided by lower levels of governments or in the private or third sectors, should they be concerned about whether their efforts are crowded out by changes in behavior on the part of individuals and institutions participating in the provision of the good or service? The theoretical literature suggests that crowd-out is an issue. The empirical literature, however, has largely failed to find a measurable crowd-out effect. With better data and more sophisticated empirical techniques, a burgeoning literature now shows that crowd-out does exist. Payne examines the recent literature on crowd-out across a variety of venues to better understand the empirical estimation issues, as well as the institutional details that can lead to an enhanced knowledge of the effects of government programs on individuals and organizations.

The proceedings of this conference are being reviewed for publication by the University of Chicago Press. The publication's availability will be announced in a future issue of the NBER Reporter. The papers will also be available at "Books in Progress" on the NBER's web page.

[back to top]

The Great Inflation Conference

Maintaining an environment of low and stable inflation is widely regarded as one of the most important objectives of economic policy in general, and the single most important objective for monetary policy in particular. An environment of price stability reduces uncertainty, improves the transparency of the price mechanism, and facilitates better planning and the efficient allocation of resources, thereby raising productivity.

In the period from 1965 to 1982, also known as the Great Inflation, inflation rose from near zero to above 15 percent and caused significant damage to the U.S. economy, including distortions in financial markets, a slumping stock market, declining productivity, and social unrest. Since the mid-1980s, monetary policy has largely succeeded in controlling inflation in the United States and other advanced countries.

The Great Inflation is considered the most important macroeconomic policy failure in the United States since World War II, and understanding its roots is important to macroeconomists. To that end, an NBER conference on "The Great Inflation" took place at the Woodstock Inn on September 25-7. It was organized by NBER Research Associate Michael Bordo of Rutgers University and Athanasios Orphanides of the Central Bank of Cyprus, and brought together scholars and policymakers for this important discussion.

The conference began with a panel session, "A View from the Trenches," in which three former central bank governors, on whose watch the Great Inflation was vanquished, reflected on their experiences. John Crow of the Bank of Canada, Donald Brash of the Reserve Bank of New Zealand, and Jacob Frenkel of the Bank of Israel provided detailed accounts of their experiences with combating inflation in their respective countries. The discussion was focused most prominently on inflation targeting and on the political battles involved in enacting inflation targeting in each of the countries.

The academic sessions that followed began with revisiting the ideas of Milton Friedman. The first paper, "The Great Inflation: Did The Shadow Know Better?" by William Poole, Robert Rasche, and David Wheelock of the Federal Reserve Bank of St. Louis, focused on the Shadow Open Market Committee. Founded in 1973, the shadow committee was based on monetarist precepts and was formed in order to critically evaluate the Federal Open Market Committee's actions and to formulate alternate policies to reduce inflation. These authors find, using modern techniques, that indeed "the Shadow knew better." There followed a discussion of the experience of Germany in the 1970s, and how policy there maintained lower inflation than most other advanced countries, and was able to avoid many of the mistakes that were made in the United States. Andreas Beyer and Otmar Issing of the European Central Bank, Vitor Gaspar of the Bureau of European Policy Advisers, and Christina Gerberding of the Deutsche Bundesbank, presented their paper on the subject: "Opting Out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods."

The discussion then turned to non-monetary explanations of the Great Inflation. The first came from Alan Blinder, NBER and Princeton University, and Jeremy Rudd, Federal Reserve Board, in "The Supply-Shock Explanation of the Great Stagflation Revisited." The authors focused on the commodity price shocks of the 1970s and the price-wage controls enacted by the government. The second paper "Stepping on a Rake: The Role of Fiscal Policy in the Inflation of the 1970s" by Christopher Sims, NBER and Princeton University, regarded fiscal policy as too accommodative at that time, aiding in the rapid increase in price pressures. The consensus of both papers was that, had policy been more combative against the forces at the time, the inflation might not have been avoided but potentially could have been far less severe.

Next on the agenda was the issue of time consistency and central bank independence. Alex Cukierman, Tel Aviv University, presented "Misperceptions about the Frequency of Price Adjustments and Asymmetric Fed's Preferences - An Assessment of their Impact on Inflation and Monetary Policy Under Burns and Miller." Without a doubt, the Federal Reserve Board of Governors of the 1970s, under Chairman Arthur Burns, was influenced heavily by political pressure; the ability to use its independence to fight inflation was masked by the unfounded need to focus solely on keeping unemployment as low as possible.

The conference then switched topics to the role of a nominal anchor, and particularly the role of inflation expectations in the formation of monetary policy. The papers presented included "The Great Inflation Drift" by Marvin Goodfriend, NBER and Carnegie-Mellon University, and Robert King, NBER and Boston University, and "Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation" by Andrew Levin, Federal Reserve Board, and John Taylor, NBER and Stanford University. If inflation expectations are not anchored, the inflation itself will not remain stable. It was argued that the increase in expectations of inflation was a fundamental reason that inflation rose so dramatically, often because of the misperceptions of policy by the Fed and a lack of coordination and communication.

International perspectives of the time surrounding the Great Inflation in the United States are important, because the United States was not the only country experiencing high inflation at the time. In their paper, "The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes," Ricardo DeCecio and Edward Nelson, both of the Federal Reserve Bank of St. Louis, showed how the United Kingdom suffered with inflation because of poor ideas and economic theory underlying their monetary policy decisions. In a second paper -- "Bretton Woods and the Great Inflation" by conference organizer Michael Bordo and co-author Barry Eichengreen of NBER and the University of California, Berkeley -- the authors posited that, before 1965, concern over external balance constrained Fed policy and anchored expectations of inflation. After 1965, when the Treasury increasingly handled policy towards defense of the dollar, the Fed paid more attention to the domestic goal of full employment. This weakened the Bretton Woods nominal anchor.

The final session revolved around learning, expectations, and policy mistakes. In "Monetary Policy Mistakes and the Evolution of Inflation Expectations," conference organizer Athanasios Orphanides and co-author John Williams of the Federal Reserve Bank of San Francisco noted that the policy of the 1960s and 1970s relied heavily on estimates of economic variables that often were misguided and not measured correctly. This led to prescriptions for policy that also were misguided, and may have contributed to the inflation that ensued. Had policymakers been learning from or even noticing the mistakes they were making, it might have been possible for them to readjust their models and to reform policy in a more optimal way.

The conference ended with a panel discussion involving Federal Reserve Vice Chairman Donald Kohn, Harold James of Princeton University, and Anna J. Schwartz of NBER. Kohn emphasized some lessons that central banks need to learn after experiences like the Great Inflation. For example, central banks are the policy actors with key responsibility for price stability; inflation expectations are critical; both vigorous debate and alternative viewpoints are essential for creating better policy; shortcuts to price stability are a recipe for disaster; and, central bankers must always exercise humility when forming policy, since much of it depends on variables that no one can estimate. James highlighted four questions we still have yet to answer: What is the dating of the Great Inflation? What caused the Great Inflation? How can inflations be ended? Why do we care about inflations? Finally, Schwartz returned to the lessons of her colleague Milton Friedman. One of the most important lessons of the Great Inflation was that the Fed incorrectly estimated the costs of disinflation for the stabilization of the real economy, and this forced it to delay deflationary policy to the point where the costs to deflate only became higher.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]

American Universities in a Global Market

An NBER conference on "American Universities in a Global Market," organized by NBER Research Associate Charles T. Clotfelter of Duke University, was held on October 2-4. Since World War II, American universities have occupied an unchallenged position of global preeminence. Owing to vigorous support of scientific research by the federal government, high rates of educational attainment, and a massive influx of scholars from Europe seeking refuge, America supplanted Europe as the home of the world's leading universities. Today, American institutions dominate the highest rungs of the various world rankings of great universities, routinely occupying the majority of the every top-twenty list.
But this position of preeminence may now be in jeopardy. The flow of foreign graduate students and scholars, while still massive, shows signs of slowing, in the wake of heightened security concerns and competition from foreign universities. Not only are European universities girding themselves for more vigorous international competition, but those in China, India, and other parts of Asia have signaled their intention to become major players in the global higher education market.
Meanwhile, America's own production of university graduates has slowed relative to that of other developed nations. Whereas in 1990 the rate of college completion in the United States (30 percent) was 11 percentage points higher than the median of a group of other developed countries; by 2004 the U.S. rate was 7 percentage points lower. And, there are unmistakable signs that America's position of leadership in the world - financial, military, intellectual, and moral - is increasingly being challenged. One perhaps small but telling example is the recently reported decline among supreme courts in other countries in number of citations to decisions issued by our own U.S. Supreme Court.

This conference examined aspects of American higher education today that will affect its global standing, in order to provide insight about the likely future of American universities. Will American universities sustain their leading role? Surely first-mover advantages and agglomeration economies, not to mention the traditions of free expression and decentralized competition, will continue to redound to our advantage. But the outcome seems far from clear.
The following papers were presented and discussed:

James D. Adams, Rensselaer Polytechnic Institute and NBER, "Is the U.S. Losing its Preeminence in Higher Education?"
Discussant: Charles Phelps, University of Rochester

John Bound, University of Michigan and NBER, and Sarah Turner, University of Virginia and NBER, "Coming to America: Where Do International Doctorate Students Study and How Do U.S. Universities Respond?"
Discussant: Michael Teitelbaum, Sloan Foundation

Paula Stephan, Georgia State University and NBER, and Grant Black, Indiana University, South Bend, "The Economics of University Lab: Science and the Role of Foreign Graduate Students and Postdoctoral Scholars"
Discussant: Harold Shapiro, Princeton University

Haizheng Li, Georgia Institute of Technology, "Higher Education in China -- Complement or Competition to U.S. Universities?"
Discussant: Debra Stewart, Council of Graduate Schools

E. Han Kim and Min Zhu, University of Michigan, "Universities as Firms: The Case of U.S. Overseas Programs"
Discussant: Peter Doeringer, Boston University

Devesh Kapur, University of Pennsylvania, "Indian Higher Education"
Discussant: Arvind Panagariya, Columbia University

Ofer Malamud, University of Chicago and NBER, "The Structure of Higher Education in the U.S. and Europe: Reflections on the Nature of the Bologna Reforms"
Discussant: Michael Rothschild, Princeton University and NBER

Lex Borghans and Frank Corvers, Maastricht University, "Mobility and the Changing Structure of Research and Higher Education in Europe"
Discussant: Hugo Sonnenschein, University of Chicago

Sunwoong Kim, University of Wisconsin, Milwaukee, "Brain Drain, Brain Gain, and Brain Competition: Changing Employment Opportunities and Career Patterns of U.S.-Trained Korean Ph.Ds"
Discussant: Elizabeth U. Cascio, Dartmouth College and NBER

Richard B. Freeman, Harvard University and NBER, "What Does Global Expansion of Higher Education Mean for the U.S.?"
Discussant: Bruce Sacerdote, Dartmouth College and NBER

Eric Bettinger, Case Western Reserve University and NBER, "To Be or Not to Be: Major Choices in Budding Scientists"
Discussant: Caroline M. Hoxby, Stanford University and NBER

Adams asks whether the United States is losing its predominance in higher education. While the growth of scientific research in Europe and East Asia since the 1980s has exceeded that of the United States -- suggesting convergence in world science and engineering -- the slowdown of U.S. publication rates in the late 1990s is a different matter. Using a panel of U.S. universities, fields, and years, Adams uncovers evidence of allocative inefficiency in public universities and university fields in the middle and bottom 40 percent of their disciplines. Private/Top 10 universities and top-20-percent university fields, however, do not display this pattern. Slow growth in tuition and state appropriations, compared to revenue growth for private universities, are possible causes of this divergence.

It is well known that the representation of foreign doctorate students at U.S. universities, particularly in science and engineering fields, has increased dramatically over the last three decades, rising to about 50 percent today from about 25 percent in the early 1970s. Much of that growth has come from new demand for advanced study in science and engineering from countries rapidly climbing a development trajectory, particularly South Korea, India, Taiwan, and - more recently - China. Bound and Turner describe the trends in the distribution of foreign doctorate students across programs of different levels of quality and institutional control and resources, and at both public universities and universities outside the most highly ranked. Expansion of doctorate education propelled by the flow of foreign students has been particularly marked outside the most highly ranked programs and at public sector universities. These differential trends highlight heterogeneity in the supply response among different universities. Whether changes in doctorate production are complementary to other university outputs, such as undergraduate education, helps to explain the pattern observed across universities.

Black and Stephan study the role of foreign graduate students and postdoctoral scholars (postdocs) in university lab science. To do this, they analyze authorship patterns for a six-month period for articles published in Science with a last author who is affiliated with a U.S. university. They conclude that international graduate students and postdocs are not only important in staffing university labs, but also play a leading role in university research.

In his paper, Haizheng Li examines the Chinese university system as a possible competitor to the United States. Enrollment in Chinese universities has increased rapidly since 1978, as has the enrollment of Chinese students abroad. Will Chinese universities continue to serve as a complement to U.S. universities by sending their best students to the United States, or will they gradually become competitors to U.S. universities? Though China has made great progress in improving its university system (China is now ranked fifth as a destination country for international students, behind only the United States, the United Kingdom, France, and Germany), the author concludes that the relative status gap between Chinese and American universities will remain until further reforms are implemented.

E. Han Kim and Min Zhu investigate the overseas programs of U.S. universities. They discover two waves of overseas programs: a supply driven wave during the late 1980s to the mid-1990s, and the current wave beginning in the early 2000s. Their data reveal that tuition-dependent universities are more likely to offer overseas programs, and real GDP per capita and tertiary school-age populations are two key determinants of the location choice. Also, U.S. universities offer lower tuition discounts in countries with higher real GDP per capita. The authors conclude that universities behave much like multinational corporations in their overseas investments: economics, not altruism, is the key driver of U.S. overseas programs.

In his investigation of Indian higher education, Kapur finds an educational system that, paradoxically, is simultaneously collapsing and thriving. Traditional multi-disciplinary universities are in a deplorable state, reflecting cleavages afflicting India's political economy. Wage premiums are higher; few faculty members are being trained (with implications for higher education in the future); and disciplines outside the professions (especially in the liberal arts) are collapsing. Yet professional training, workforce training, and other highly specialized forms of education are thriving. Does India face a future with a workforce that's reasonably well trained but narrow in its outlook and possibly less liberal?

Europe is adopting some of the unique aspects of the American system of higher education, including a standardized degree structure and a system of transferable academic credits. Malamud reflects on how the characteristics of American higher education are responsible for its success and the possible consequences of these European reforms for the future of American higher education. This paper explores the issues from a theoretical and empirical perspective, focusing on the benefits of flexibility and competition associated with the American system of higher education.

Borghans and Corvers document changes in research and higher education in Europe and investigate potential explanations for the strong increase in its international orientation. While higher education started to grow substantially around 1960, only a few decades later, research and higher education transformed gradually to the American standard. Decreased communication costs are the likely causes of this trend. This transformation is most clearly revealed in the change in the language used in research from the national language/Latin, German, and French to English. This suggests that returns to scale and the transferability of research results strongly influence adaptation of the international standard.

Sunwoong Kim examines changes in migration patterns of U.S.-trained Korean PhDs over the last several decades. Roughly speaking, three different periods are identified: brain drain (1950-70), brain gain (1970-97), and brain competition (since 1997). The first period is typical of low-income countries in which talented students go to a rich country for further education and stay there after their training; the later two periods reflect a more balanced circulation between Korea and the United States. The author finds the Korean experience useful as a leading-edge example of the internationalization of U.S. higher education with China and India.

Between 1970 and 2006 the number of students enrolled in institutions of higher education increased from 29 million to over 141 million. Freeman examines the implications of this expansion in foreign higher education for the United States. The proportion of young people going to college in advanced countries has risen above those in the United States in some countries, while higher education in developing countries is increasing at a rapid pace, greatly diminishing the U.S. share of the world's university students and graduates. Freeman predicts a continued decrease in the U.S. share of global university enrollment, while deferring judgment as to whether the United States should respond by encouraging immigration, or rather through off-shoring of some university graduate-level work overseas.

Over the last forty years, the supply of U.S.-born scientists and engineers has dropped dramatically. Bettinger sees worries of shortages as misplaced, however. Interest in the sciences among undergraduates remains high. The fall in U.S.-born candidates for advanced degrees does not reflect educational deficiencies but other factors, notably the attraction of careers in higher-paying fields such as business or law. Though fewer U.S. citizens are pursuing doctoral degrees in science, technology, engineering, and mathematics, the United States continues to lead the world in production of doctorates, and a significant proportion of these students stay in the United States. Bettinger concludes that the shortage of scientists and engineers is overstated.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]

Europe and the Euro

An NBER conference on "Europe and the Euro" took place on October 17 and 18 at Bocconi University in Milan. The conference highlighted the success of the first ten years of the Euro in terms of product market reforms, increased trade between members, successful monetary policy by the European Central Bank (ECB) -- both in normal times and in the most recent turbulent months, progress towards more financial liberalization, and integration. However, the conference also noted the need for further progress in terms of labor market reforms, banking supervision and regulation on the European level, integration of financial markets, and synchronization of business cycles.
Organizers Alberto F. Alesina, NBER and Harvard University, and Francesco Giavazzi, NBER and Bocconni University, chose these papers to discuss:

Silvia Ardagna, Harvard University; Alberto F. Alesina; and Vincenzo Galasso, Università Bocconi "The Euro and Structural Reforms"
Discussant: Otmar Issing, European Central Bank

Barry Eichengreen, University of California, Berkeley and NBER, "Is the Euro Forever?"

Discussant: Martin Feldstein, Harvard University and NBER

Antonio Fatas and Ilian Mihov, INSEAD, "The Euro and Fiscal Policy"
Discussant: Roberto Perotti, Universita Bocconi

Jeffrey A. Frankel, Harvard University and NBER, "The Estimated Effects of the Euro on Trade: Why Are They Below Historical Evidence on Effects of Monetary Unions among Smaller Countries?"
Discussant: Silvana Tenreyo, London School of Economics

Ulf Soderstrom, Universita Bocconi, "Re-Evaluating Swedish Membership in the EMU: Evidence from an Estimated Model" and Riccardo DiCecio and Edward Nelson, Federal Reserve Bank of St. Louis, "Britain and the Euro: Re-considering the Pros and Cons"
Discussant: Carlo Favero, Universita Bocconi

Matteo Bugamelli and Roberta Zizza, Bank of Italy; and Fabiano Schivardi, Universita di Cagliari, "The Euro and Firm Restructuring"
Discussant: Gianmarco Ottaviano, Universita di Bologna

Anil K Kashyap, University of Chicago and NBER, and Reint Gropp, European Business School, "A New Metric for Banking Integration in Europe"
Discussant: Loretta Mester, Federal Reserve Bank of Philadelphia

Alberto Giovannini, Unifortune Asset Management, Milan, "The Integration of European Financial Markets: Why Has It Not Happened Yet?"
Discussant: Richard Portes, London Business School

Lucrezia Reichlin, European Central Bank, and Domenico Giannone, Universite Libre de Bruxelles, "Business Cycles in the Euro Area"
Discussant: Olivier J. Blanchard, MIT, NBER, and the International Monetary Fund

Steven G. Cecchetti, Bank for International Settlements and NBER, and Kermit L. Schoenholtz, Citigroup, "ECB Policy: The First Decade and Beyond"
Discussant: Pervenche Beres, European Parliament

Alesina and his co-authors investigate whether the adoption of the Euro has facilitated structural reforms, which they define as deregulation in the product markets and both liberalization and deregulation in the labor markets. After reviewing theoretical arguments linking the adoption of the Euro to structural reforms and investigating the empirical evidence, they find that the adoption of the Euro has been associated with an acceleration of the pace of structural reforms in the product market. In contrast, they find no connection between the adoption of the Euro and labor market reforms, at least as measured by changes in the legislation of primary labor markets. Their paper also discusses issues concerning the sequencing of labor market versus product market reforms.

In his paper, Eichengreen concludes that it is unlikely that one or more members of the Euro area will leave in the next ten years and that the total disintegration of the Euro area is even more unlikely. The technical difficulties of reintroducing a national currency should not be minimized. Nor is it obvious that the economic problems of the participating member states can be significantly ameliorated by abandoning the Euro, although that possibility cannot be dismissed either.

The creation of a single currency in Europe was accompanied by significant changes in the institutional setting for fiscal policy. Fatas and Milhov ask whether these institutional changes have led to a change in the conduct of fiscal policy by the members of the Euro area. The authors review the behavior of fiscal policy after the introduction of the Euro in several dimensions: procyclicality, volatility, coordination, and the role of automatic stabilizers. They characterize how the common currency and the constraints associated with the Stability and Growth Pact have shaped fiscal policy among the members of the union. In order to provide a more complete picture of fiscal policy, they also report results related to the behavior of fiscal policy at the national level. Their results show that despite the significant change in the institutional setting, the behavior of fiscal policy in the Euro area is mildly procyclical and has not changed much since the introduction of the new currency. In contrast, U.S. fiscal policy has become distinctly countercyclical. Also, there has been a broad-based decline in the volatility of discretionary fiscal policy in all of the major economies. Furthermore, the discrepancy of fiscal policy across Euro-area countries -measured by the dispersion of cyclically adjusted balances - has decreased threefold since 1999.

Frankel seeks to address two questions in his paper. First, do the effects on intra-Euroland trade estimated in the Euro's first four years hold up in the second four years? The answer is yes. Second, and more complicated, what is the reason for the large discrepancy vis-à-vis other currency unions, a gap of between 15 and 200 percent? First, the Euro is still very young. Second, the European countries are much bigger than most of those who had formed currency unions in the past. Third, there is endogeneity about the decision to adopt an institutional currency link: perhaps the high correlations estimated in earlier studies were spurious, an artifact of reverse causality. Contrary to expectations, though, Frankel finds no evidence that any of these factors explains any share of the gap, let alone all of it. Instead, surprisingly, the discrepancy appears to stem from sample size. If one estimates the effects of the Euro versus other monetary unions in a large sample that includes all countries and all years, thereby bringing to bear as much information as possible on questions such as the proper coefficients on common borders and languages in a gravity model, then the effect of the Euro in the five-to-eight year interval is large and comparable to the effect of the other non-Euro monetary unions.

Soderstrom revisits the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. He shows that the Swedish business cycle since the mid-1990s has been closely correlated with that of the Euro area economies, more so than that of some current EMU members. Then, using an estimated model of the Swedish economy, he shows that while asymmetric shocks have been important fluctuations in the Swedish economy since 1993, to a large extent the exchange rate has acted to destabilize, rather than stabilize, the economy. Finally, his model predicts that Swedish inflation and GDP growth might have been slightly higher if Sweden had been a member in EMU since 1999, but also that GDP growth might have been more volatile. EMU membership also could have implied higher inflation in Sweden in 2004-5, when inflation was exceptionally low. Thus, the evidence is not conclusive.

Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the Euro area, have increased our ability to evaluate the effects that joining a monetary union would have on the U.K. economy. DiCecio and Nelson analyze the debate on the U.K.'s monetary policy options using a structural open-economy model.

Bugamelli and his co-authors test whether and how the adoption of the Euro, narrowly defined as the end of competitive devaluations, has affected member states' productive structures, distinguishing between within- and across-sector reallocation. They find that the Euro has been accompanied by a reallocation of activity within, rather than across, sectors. Since adoption of the Euro, productivity growth has been relatively stronger in country-sectors that once relied more on competitive devaluations to regain price competitiveness. Firm-level evidence from Italian manufacturing confirms that low-tech businesses, which arguably benefited most from devaluations, have been restructuring more since the adoption of the Euro. Restructuring has entailed a shift of business focus from production to upstream and downstream activities, such as product design, advertising, marketing, and distribution, and a corresponding reduction in the share of blue-collar workers.

Most observers have concluded that while money markets and government bond markets are rapidly integrating following the introduction of the common currency in the Euro area, there is little evidence that a similar integration process is taking place for retail banking. Data on cross-border retail bank flows, cross-border bank mergers, and the law of one price reveal no evidence of integration in retail banking. Kashyap and Gropp show that the previous tests of bank integration are weak, in that they are not based on an equilibrium concept and are neither necessary nor sufficient statistics for bank integration. They propose a new test of integration based on convergence in banks' profitability. The new test emphasizes the role of an active market for corporate control and of competition in banking integration. European listed banks' profitability appears to converge to a common level. There is weak evidence that competition eliminates high profits for these banks, and underperforming banks tend to show improved profitability. Unlisted European banks differ markedly. Their profits show no tendency to revert to a common target rate of profitability. Overall, the banking market in Europe appears far from being integrated. In contrast, in the United States both listed and unlisted commercial banks profits converge to the same target, and high profit banks see their profits driven down quickly.

Giovannini explains what a single, integrated European securities market is and why we do not have it yet. He argues that any market, including a securities market, is defined by the arrangements put in place to ensure delivery of goods and payments to the counterparties in each trade (post-trading arrangements). Analyzing these arrangements is the most reliable way to assess the extent to which there is integration in a geographic area like the EU or the Euro Area. In his paper, Giovannini analyzes post-trading arrangements in the EU and discusses their reform, the objective of which is to obtain a single EU securities market.

Reichlin and her co-authors note that in those EMU countries that started from similar initial conditions, in terms of real activity in the 1970s, business cycles are very similar and no significant change can be detected since 1999. For the other countries, there is a lot of uncertainty. No clear change since the EMU can be identified in either group. As for the Euro area business cycle, per capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and U.S. observed developments. The gap between U.S. and Euro area GDP per capita has been 30 percent on average since 1970, and there is no sign of catching up or of further widening.

In their history of the first decade of European Central Bank (ECB) policy, Cecchetti and Schoenholtz discuss key challenges for the next decade. Beyond the ECB's track record and an array of published critiques, their analysis relies on unique source material: extensive interviews with current and former ECB leaders and with other policymakers and scholars who viewed the evolution of the ECB from privileged vantage points. The researchers share the assessment of their interviewees that the ECB has enjoyed many more successes than disappointments. These successes reflect the ECB's design and implementation. Looking forward, the authors highlight the unique challenges posed by enlargement and, especially, by the Euro area's complex arrangements for guarding financial stability. In the latter case, the key issues are coordination in a crisis and harmonization of procedures. As several interviewees suggested, in the absence of a new organizational structure for securing financial stability, the current one will need to function as if it were a single entity.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]

Understanding Long-Run Economic Growth: A Conference Honoring the Contributions of Kenneth Sokoloff

The NBER, the All-UC Economic History Group, and the University of California, Los Angeles (UCLA) jointly sponsored "Understanding Long-Run Economic Growth: A Conference Honoring the Contributions of Kenneth Sokoloff" on November 7 and 8 in Los Angeles. NBER Research Associates Dora L. Costa and Naomi R. Lamoreaux of UCLA served as co-organizers of this memorial tribute to Sokoloff, who died in May 2007 at the age of 54. He had been a member of the NBER's Program on the Development of the American Economy and a professor of economics at UCLA for decades.
More than 150 scholars attended the conference, with participants coming from five different continents (North and South America, Europe, Asia, and Australia). In addition to the formal academic program, Douglass C. North, co-winner of the 1993 Nobel Prize in economics, gave an after-dinner address that interwove reminiscences about Sokoloff with an impassioned brief for the importance of studying economic history and, in particular, the history of economic institutions. Robert W. Fogel, who shared the Nobel Prize with North, gave a paper at a session immediately preceding the dinner, and the two great scholars enlivened the evening with their ongoing repartee about how economic history should be written.
These papers were presented and discussed:

Stanley L. Engerman, University of Rochester and NBER (joint with Kenneth L. Sokoloff), "Once Upon a Time in the Americas: Land and Immigration Policy in the New World"

Discussant: Peter Lindert, University of California, Davis

James A. Robinson, Harvard University and NBER, and Camilo Garcia, MIT, "The Myth of the Frontier"
Discussant: Ronald Rogowski, University of California, Los Angeles

Stephen Haber, Stanford University and NBER, and Victor Menaldo, Stanford University, "Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse"
Discussant: Jeffrey Frieden, Harvard University

Daniel Kaufmann, World Bank, "Corruption and Capture in Economic Development: A Few Reflections and Some Evidence"
Discussant: Daniel Treisman, University of California, Los Angeles

Claudia Goldin and Lawrence F. Katz, Harvard University and NBER, "Mass Secondary Schooling and the State: The Role of State Compulsion in the High School Movement"
Discussant: David Card, University of California, Berkeley and NBER

Naomi R. Lamoreaux; Kenneth L. Sokoloff; and Dhanoos Sutthiphisal, McGill University and NBER, "The Reorganization of Inventive Activity in the United States in the Early Twentieth Century"
Discussant: Ariel Pakes, Harvard University and NBER

Robert W. Fogel, University of Chicago and NBER, "The Impact of the Asian Miracle on the Theory of Economic Growth"

B. Zorina Khan, Bowdoin College and NBER, "Premium Inventions: Patents and Prizes as Incentive Mechanisms in Britain and the United States, 1750-1930"
Discussant: Manuel Tratjenberg, Tel Aviv University

Sukkoo Kim, Washington University in St. Louis and NBER, and Sebastian Galiani, Washington University in St. Louis, "The Law of the Primate City in the Americas"
Discussant: Edward Leamer, University of California, Los Angeles and NBER

John Majewski, University of California, Santa Barbara, and Daniel Bogart, University of California, Irvine, "Population Densities, Political Structures, and the Early Corporation: The Transportation Revolution in the U.K. and United States"
Discussant: John J. Wallis, University of Maryland and NBER

Jean-Laurent Rosenthal and Philip T. Hoffman, Caltech, and Gilles Postel-Vinay, EHESS, "History, Geography, and the Markets for Mortgage Loans in 19th Century France"
Discussant: Joel Mokyr, Northwestern University

Engerman and Sokoloff examine land and immigration policies across the range of colonies/societies established by the Europeans in the New World over the sixteenth, seventeenth, eighteenth, and nineteenth centuries to improve our understanding of whether there are systematic patterns in the evolution of institutions. The case of the Americas provides an excellent natural laboratory for studying the effects of different forces on the development of institutions. First, these societies were all settled by a limited set of European countries at roughly the same time, and were extremely diverse with respect to many aspects of their endowments. Second, although their initial conditions differed enormously in some respects, nearly all of these New World societies had a relative abundance of land and natural resources, and came to specialize quite early in their histories in agriculture and mining. The policies they adopted toward the ownership and use of land, and the openness toward labor flows, had very significant implications for their long-run paths of development. This comparative study not only helps to establish a systematic record, but also attempts to identify salient factors in accounting for the variation over time and place in the design of strategic institutions.

Does the presence of an open frontier explain why the United States became democratic and, at least implicitly, prosperous? In their paper, Robinson and Garcia begin with the contradictory observation, that almost every Latin American country had a frontier in the nineteenth century as well. They show that while the data does not support the Frontier thesis, it is consistent with a more complex "conditional Frontier thesis": that the effect of the frontier is conditional on the way it was allocated, and that this in turn depends on political institutions at the time of frontier expansion. They show that for countries with the worst political institutions, there is a negative correlation between the historical extent of the frontier and contemporary income per capita. For countries with better political institutions, this correlation is positive. The effect of the frontier on democracy is positive irrespective of initial political institutions, but it is larger the better were these institutions.

Is there a relationship between "point source" natural resource dependence and authoritarianism? In order to answer this question, Haber and Menaldo develop unique datasets that allow them to focus on within-country variance in resource dependence and regime types. Their results indicate that dependence on oil and minerals is not associated with the undermining of democracy or less complete transitions to democracy. These results are at variance with a large body of scholarship that uses pooled cross-sectional techniques and finds a negative relationship between natural resource dependence and democracy. The authors subject those cross-sectional results to a battery of standard diagnostics and find that they are very fragile; the source of that fragility is the use of pooled cross-sectional data to address a question about change over time. Haber and Menaldo suggest that when testing theories about processes that take place within countries over time, assembling time-series datasets designed to operationalize explicitly specified counterfactuals better matches the theory and empirics than do regressions centered on the cross-sectional analysis of longitudinally truncated data.

Unbeknownst to many, Ken Sokoloff's intellectual and geographical adventures also led him to contribute to the field of development. Through his deep historical understanding of the role of endowment and institutions, he provided insights for Latin America today, and for other areas. Kaufmann briefly reviews some of Sokoloff's contributions to development. Then he focuses on a study of one narrow link between governance and development, which intrigued Ken as a scholar and teacher: namely, the role of State Capture in development. He summarizes recent research on the effects of capture on development, and goes on to present new empirical results based on a micro-dataset comprised of thousands of investment projects in developing countries whose performance has been rated by the World Bank's evaluation unit. He investigates the links between state capture, administrative corruption, and other factors and controls and the performance of such investment projects. The results suggest non-trivial effects of capture on investment project performance.

In the three decades after 1910, the fraction of U.S. youths enrolled in public and private secondary schools soared from 18 to 71 percent and the fraction graduating increased from 9 to 51 percent. At the same time, state compulsory education and child labor legislation became more stringent. It might appear from the timing that the laws caused the increase in education rates. Goldin and Katz evaluate that possibility using contemporaneous evidence on enrollments and the microdata from the 1960 census to examine the effect of the laws on overall educational attainment. Their estimation approach exploits cross-state differences in the timing of changes in state laws. The expansion of state compulsory schooling and child labor laws from 1910 to 1939 can, at best, account for 6 to 7 percent of the increase in high school enrollments and can account for about the same portion of the increase in the eventual educational attainment for the affected cohorts over the period. The "state," in the form of localities, already was providing educational resources in the United States. Compulsory education laws had larger impacts in other nations where the laws compelled the state to expand educational resources.

The standard view of U.S. technological history is that the locus of invention shifted during the early twentieth century to large firms whose in-house research laboratories were superior sites for advancing the complex technologies of the second industrial revolution. In recent years, this view has been subject to increasing criticism. At the same time, new research on equity markets during the early twentieth century suggests that smaller, more entrepreneurial enterprises were finding it easier to gain financial backing for technological discovery. Lamoreaux and her co-authors use data on the assignment (sale or transfer) of patents to explore the extent to which, and how, inventive activity was reorganized during this period. They find that two alternative modes of technological discovery developed in parallel during the early twentieth century. The first, concentrated in the Middle Atlantic region, centered on large firms that seem to have owed their prominence less to R and D labs than to their superior access to the region's rapidly growing equity markets. The other, located mainly in the East North Central region, consisted of smaller, more entrepreneurial enterprises that drew primarily on local sources of funds. Both modes seem to have made roughly equivalent contributions to technological change during this period.

Fogel began by reviewing the concept of growth theory, tracing its origins and its evolution. After World War II, there were wide-ranging debates about the future of economic development for the American economy, the economies of Europe, and the economies of less developed nations. The pessimistic views of stagnation for the United States and other OECD economies -- because there was something inherently unstable in the operation of capitalistic economies -- were proved to be unfounded. However, the growing gap in income between developed and less developed nations led to an emphasis on cultural and ideological barriers to economic growth in poor countries, worries about over-saving, and concerns that export-led growth was exploitative. The remarkable growth of the four Asian dragons -- Hong Kong, Singapore, South Korea, and Taiwan -- and, more recently, of Malaysia, China, Indonesia, and Thailand was not only not forecast, but also was believed to be a temporary fluke. Fogel concluded by predicting that by 2030 China and Southeast Asia combined would have a total GDP that exceeds that of the United States and the five largest European countries combined. Nevertheless, U.S. per capita income in 2030 very likely will still be several times greater than that of China.

A number of economists have been persuaded by the implications of theoretical models of prizes and subsidies and have begun to lobby for these policies as superior alternatives to patent institutions. The late-eighteenth and nineteenth centuries provide a natural experiment for studying the emergence, evolution, and effects of different incentive systems for technological innovations. Khan's analysis is based on samples of "great inventors" and "ordinary inventors" in Britain and the United States, and includes their patents and inventions, as well as prizes granted during the critical transition from the First to the Second Industrial Revolutions. The results suggest that the award of prizes tended to be less systematic than that of patents and more susceptible to misallocation, but the results varied by institutional context. If inventors respond to expected benefits, these findings imply that prizes may offer fewer incentives for investments in inventive activity.

Kim and Ghaliani explore the causes of urban primacy in the Americas using the insight that primate cities are often political capitals. Using extensive data on cities, they estimate the impact of capital city status on urban concentration after controlling for geographic, climatic, and economic factors. They find that political capitals, both national and provincial, contribute significantly more to urban concentration in Latin America than in North America although there are important country variations within these areas. They suggest that one possible cause of the differing patterns of urban development in the Americas is the differences in the centralization of political power in the Americas, a factor which has deep colonial roots.

Majewski and Bogart compare the evolution of transportation organizations in the United Kingdom and the United States - both world leaders in transport development by the mid-nineteenth century - with a focus on the differences in their chartering regimes. They show that U.S. state governments incorporated far more transportation companies per person at far lower fees than did the U.K. Parliament. Their initial investigation suggests that the key difference was the greater degree of democracy in the United States and its competitive economic environment in which cities and localities were engaged in a race to improve their transport links.

Rosenthal, Hoffman, and Postel-Vinay take two themes in Kenneth Sokoloff's research - the negative effects of inequality and the positive effects of large, competitive markets -- and examine their impact on mid-nineteenth-century French mortgage markets. In particular, they document a negative externality from inequality: when the distribution of wealth is too skewed, the middle class is excluded from the market. But there is also a second, positive externality generated by the geographical density of markets. The authors distinguish its effects in the credit market itself from possible spillovers from the comparable externality in product markets. They proceed in four steps: 1) summarizing the sources of their data and their aggregate findings on French credit markets; 2) analyzing local credit markets, which suggest that inequality had adverse effects on lending; 3) searching for the positive externality by examining loans between inhabitants of different cities and towns; and 4) showing that there were indeed positive network externalities in credit markets, which are consistent with a queuing model. Although most loans were local, the credit network allowed for significant inter-market flows of resources, they find.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]

Microeconomics, Efficiency, and Welfare: Lessons for Latin America

The NBER and Universidad de los Andes in Santiago, Chile co-sponsored this year's Inter-American Seminar on Economics on "Microeconomics, Efficiency, and Welfare: Lessons for Latin America." The conference was held in Santiago on November 10 and 11. Organizers Sebastian Edwards of NBER and University of California, Los Angeles, and Alexander Galetovic of Universidad de los Andes chose the following papers to discuss:

Stephen H. Haber, Stanford University and NBER, and Aldo Musaccio, Stanford University, "Foreign Entry and the Mexican Banking System, 1997-2007"
Discussant: Alejandro Micco, Chilean Ministry of Finance

Hoyt Bleakley, University of Chicago and NBER, and Kevin Cowan, Banco Central de Chile, "Mishmash or Mismatch: Balance Sheet Effects and Emerging Market Crises" Discussant: Sebastián Edwards

Marcela Eslava, Universidad de Los Andes; John Haltiwanger, University of Maryland and NBER; Adriana Kugler, University of Houston and NBER; and Maurice Kugler, Wilfrid Laurier University, "Lower Barriers to Entry, Experimentation and Aggregate Productivity: Lessons from Colombian Manufacturing Plants"
Discussant: Roberto Álvarez, Banco Central de Chile

Fernando Diaz, Alexander Galetovic, and Ricardo Sanhueza, Universidad de los Andes, "Mobile-Fixed Substitution and Telecomm Liberalization"
Discussant: Claudio Agostini, Universidad Alberto Hurtado

David MacKenzie, The World Bank, and Ernesto Schargrodsky, Universidad di Tella, "Buying Less, but Shopping More: The Use of Non-market Labor during a Crisis"
Discussant: Harald Beyer, Centro de Estudios Públicos

Rodrigo Soares, University of Maryland and NBER, and Romero Rocha, PUC, "Evaluating the Impact of Community-Based Health Interventions: Evidence from Brazil's Family Health Program"
Discussant: Ernesto Schargrodsky

Cesar Martinelli, ITAM, "Press and Good Government"
Discussant: Alexander Galetovic

Alejandra Mizala, Universidad de Chile, and Miguel Urquiola, Columbia University and NBER, "School Markets: The Impact of Information Approximating Schools' Effectiveness" (NBER Working Paper No. 13676)
Discussant: Francisco Gallego, Universidad Católica

Juan Eberhard, Yale University, and Eduardo Engel, Yale University and NBER, "The Educational Transition and Decreasing Wage Inequality in Chile"
Discussant: Andrea Repetto, Universidad Adolfo Ibáñez

How does the entry of foreign banks affect pricing and the availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question, because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks; the foreign market share increased five-fold between 1997 and 2007 as a result. Haber and Musaccio construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. Their analysis also indicates that foreign banks screen borrowers more closely and charge higher lending rates than domestic banks. One of their most robust findings is that foreign ownership is associated with a decrease in housing lending. This suggests that there may be less housing lending going on because foreign-owned banks may wish to avoid Mexico's difficult property rights environment.

Bleakley and Cowan critically assess the recent empirical literature on the importance of dollar debt and balance-sheet effects in the emerging-market financial crises of the 1990s. Using a simple model, they discuss which specifications are theoretically appropriate, and they provide additional insights as to the proper interpretation of the reduced-form evidence in the literature. Using harmonized microdata on corporations across a dozen countries in Latin America and Asia, they replicate common specifications for the effect of dollar debt on investment and output at the firm level. In this light, they suggest that the literature on corporate level currency mismatch is hardly a mish-mash, but in fact is quite concordant.

Eslava, Haltiwanger, Kugler, and Kugler use plant output and input prices to decompose the profit margin into three parts: productivity, demand shocks, and input costs. They find that market-oriented reforms increase the effect of market fundamentals on market entry. Their definition of a market is one industry in a particular region. Prior to reforms, they find, market fundamentals often work in the wrong direction with respect to the determinants of entry. These findings suggest that frictions from poor market-oriented institutions have distorted the process of entry. The authors also find that market reforms increased the marginal effect of productivity, and of other market fundamentals, on plant entry. There is also evidence that market reforms yielded an environment conducive to greater market experimentation.

The development and diffusion of mobile telephony has been fast and universal, but whether mobile and fixed phones are substitutes is still a contentious issue. Most studies tend to find positive cross-price elasticity; some suggest that there is complementarity. In any case, it seems fair to say that the evidence is still not compelling. Consequently, tariff liberalization of fixed telephony is still an issue and it seems that regulation will be with us for some time in most countries. Diaz, Galetovic, and Sanhueza argue, however, that under particular circumstances one can perform a simple (non-statistical) test of substitution that relies only on the standard properties of demand curves. They perform this test for Chile and find compelling evidence of mobile-fixed substitution.

Households that allocate time between market and non-market uses should respond to income variations by adjusting the time they devote to shopping and other home production activities. MacKenzie and Schargrodsky exploit high-frequency data on household expenditures to examine the use of changes in shopping intensity as a method of mitigating the effects of the 2002 Argentine economic crisis. They find that although the total quantity and real value of goods purchased fell during the crisis, consumers were doing more shopping. This increase in shopping enabled households to seek out lower prices and to locate substitutes, allowing a given level of expenditure to buy more goods. The magnitude and prevalence of these effects suggest that this non-market use of labor can be an important coping strategy for households during a recession.

Soares and Rocha analyze the direct and indirect impacts of Brazil's Family Health Program. They estimate the effects of the program on mortality and on household behavior related to child labor and schooling, employment of adults, and fertility. They find that the program has consistent effects on reductions in mortality throughout the age distribution, but mainly at earlier ages. Municipalities in the poorest regions of the country particularly benefit from the program. For these regions, implementation of the program is also robustly associated with increased labor supply of men between ages 41 and 55, and reduced fertility of women between ages 31 and 40.

Martinelli presents a model of (possibly hidden) capture of a democratically elected government by the elite. He shows that there is a U-shaped relationship between government turnover and the extent of capture. When politicians are very patient, economic conditions are bad, and press coverage of government behavior is not reliable, the best equilibrium for the majority of citizens requires punishing governments with no re-election, even if citizens know there is no capture in equilibrium. If politicians are not very patient, then the best equilibrium for the majority may not imply government turnover, regardless of the quality of press coverage, even if citizens know that there is a positive probability of hidden capture. Finally, if politicians are quite impatient, and when economic conditions are good and press coverage is not reliable, the best equilibrium for the majority requires not re-electing governments.

The impact of competition on academic outcomes likely depends on whether parents are informed about schools' effectiveness or value added (which may or may not be correlated with absolute measures of their quality), and on whether this information influences their school choices, thereby affecting schools' market outcomes. To explore these issues, Mizala and Urquiola consider Chile's SNED program, which seeks to identify effective schools, selecting them from within "homogeneous groups" of arguably comparable institutions. Its results are widely disseminated, and the information it generates is quite different from that conveyed by a simple test-based ranking of schools (which in Chile, turns out to largely resemble a ranking based on socioeconomic status). The authors rely on a sharp regression discontinuity to estimate the effect that being identified as a SNED winner has on schools' enrollment, tuition levels, and socioeconomic composition. Through five applications of the program, they find no consistent evidence that winning a SNED award affects these outcomes.

Eberhard and Engel find that between 1975 and 1990 the wage of the 90th (richest) percentile in Chile increased faster than the median wage and the wage of the 10th percentile. By contrast, from 1990 on the wage of the 10th percentile and the median wage grew faster than the wage of the 90th percentile. This is one of many findings showing that wage inequality in Chile has been falling, first slowly, then faster, over the last two decades. The pattern emerges most clearly once cyclical components of wage inequality measures are removed. To understand this decrease in wage inequality, the authors group workers according to their cohort and educational attainment and decompose the variance of (log) wages into within- and between-group variances. They find that the significant decrease in wage inequality is largely attributable to a decrease in between-group variance. The evidence suggests that this decrease in wage inequality was caused by a secular decline in the skill premium for tertiary education resulting from the deregulation of this market in 1980. Somewhat surprisingly, the marked decrease in the skill premium can be found in the data one decade earlier, yet the corresponding decrease in wage inequality was canceled by a Kuznets-type effect, where an increasing but still small fraction of workers with tertiary education led to more inequality, during the 1985-95 period.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]

Economic Aspects of Obesity

Genetic factors cannot account for the rapid increase in obesity since 1980 -- these factors change slowly over long periods of time. Therefore, economists can play a role in examining the determinants and consequences of this trend, although the factors at work are complex, and the policy prescriptions are by no means straightforward. To increase our understanding of this subject, the NBER held a conference on the "Economic Aspects of Obesity" at Louisiana State University in Baton Rouge on November 10 and 11. The organizers were Michael Grossman, City University of New York Graduate Center and NBER, and Naci H. Mocan, Louisiana State University and NBER.
Several of the conference papers addressed the role of reductions in real food prices in the period at issue, and reported that these declines could account for some of the increase in obesity. These papers bear on the question of whether taxes on food, especially dense and high-caloric fast food, provide an effective public policy tool for addressing obesity. The case for such taxes is weakened if fully informed consumers are taking account of all the costs of their food choices, and strengthened if the obese do not pay for their higher medical expenditures through differential payments for health care and health insurance, and if body weight decisions are responsive to the incidence of the medical care costs associated with obesity. One paper found that health insurance does indeed "make you fat." But others at the conference argued that a tax on fast food could actually increase caloric intakes via substitution towards non-taxed food. An alternative policy might be financial rewards for weight loss. But another paper found very small average weight loss associated with worksite programs with this feature. Still other papers found evidence that access to parks, gymnasiums, and other recreational facilities increase exercise and reduce obesity. Whether this finding bears directly on the suggestion that such facilities should receive public subsidies depends on the extent to which people with unobserved tastes for physical activities choose to locate in areas with better access to these facilities.

The economic consequences of obesity are complex. One paper found that overweight teens have about the same levels of educational attainment as teens of normal weight. One explanation is that the overweight offset the factors associated with poor health and discrimination by allocating more time to schoolwork and less time to sports and other leisure time activities. Another paper reported that the observed negative relationship between obesity and wages is not caused by obesity per se but rather by a factor such as physical attractiveness or discrimination. One paper contained suggestive evidence that this negative relationship between obesity and wages could be attributable in part to low self-esteem on the part of the obese.
These topics were discussed at the conference:

"Effects of the Minimum Wage on Obesity"
David O. Meltzer, University of Chicago and NBER, and Zhuo (Adam) Chen, Centers for Disease Control and Prevention
Discussant: Kristin Butcher, Wellesley College

"Outcomes in a Program that Offers Financial Rewards for Weight Loss"
John Cawley, Cornell University and NBER, and Joshua A. Price, Cornell University
Discussant: Dhaval Dave, Bentley College and NBER

"Food Prices and Body Weight Among Older Americans"
Dana Goldman and Darius Lakdawalla, RAND and NBER, and Yuhui Zheng, RAND
Discussant: Michael Anderson, University of California at Berkeley

"Economic Contextual Factors and Child Body Mass Index"
Lisa M. Powell, University of Illinois at Chicago, and Frank J. Chaloupka, University of Illinois at Chicago and NBER
Discussant: Tinna Asgeirsdottir, University of Iceland

"The Relationship between Neighborhood Quality and Obesity among Children"
Bisakha Sen, Stephen Mennemeyer, and Lisa C. Gary, University of Alabama at Birmingham
Discussant: Susan Averett, Lafayette College

"Studying the Child Obesity Epidemic with Natural Experiments"
Robert Sandy, Gilbert Liu, John Ottensmann, Jeff Wilson, and O.T. Ford, Indiana University; and Rusty Tchernis, Indiana University and NBER
Discussant: Barbara Schone, Agency for Healthcare Research and Quality

"Food Stamp Program and Consumption Choices"
Neeraj Kaushal, Columbia University and NBER, and Qin Gao, Fordham University
Discussant: Kerry Anne McGeary, Drexel University

"Physical Activity: Economic and Policy Factors"
Melayne M. McInnes, University of South Carolina, and Judy A. Shinogle, University of Maryland
Discussant: James Sallis, San Diego State University

"Effects of Weight on Adolescent Educational Attainment"
Robert Kaestner, University of Illinois at Chicago and NBER; Michael Grossman; and Ben Yarnoff, University of Illinois at Chicago
Discussant: Jeffrey DeSimone, University of Texas at Arlington and NBER

"Where Does the Wage Penalty Bite?"
Christian A. Gregory, University of North Carolina at Greensboro, and Christopher J. Ruhm, University of North Carolina at Greensboro and NBER
Discussant: Roy Wada, University of California, Los Angeles

"Does Health Insurance Make You Fat?"
Jay Bhattacharya and M. Kate Bundorf, Stanford University and NBER; Noemi Pace, University College of London; and Neeraj Sood, Rand and NBER
Discussant: Alan C. Monheit, University of Medicine and Dentistry of New Jersey School of Public Health and NBER

"Obesity, Self-esteem, and Wages"
Naci H. Mocan, and Erdal Tekin, Georgia State University and NBER
Discussant: Sara Markowitz, Emory University and NBER

Since the 1970s, the real minimum wage in the United States has declined by nearly half, and obesity has increased. Because consumption of food away from home as been suggested as a major cause of increasing obesity, and minimum wage labor is a major contributor to the cost of "fast food", Meltzer and Chen examine whether changes in the minimum wage are associated with changes in bodyweight over this period. Using data from the Behavioral Risk Factor Surveillance System from 1984-2006, they test whether variations in the real minimum wage were associated with changes in body mass index (BMI). They also examine whether this association varied by gender, education, and income, and they test whether the association varied over the BMI distribution. They find that a $1 decrease in the real minimum wage was associated with a 0.06 decrease in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10 percent of the change in BMI since 1970, they conclude. The declining real minimum wage has contributed to the increasing rate of overweight and obesity in the United States.

Obesity rates in the United States have doubled since 1980. Given the medical, social, and financial costs of obesity, a large percentage of Americans are attempting to lose weight at any given time but the vast majority of weight loss attempts fail. Researchers continue to search for safe and effective methods of weight loss, and Cawley and Price evaluate one promising method: offering financial rewards for weight loss. They study data on 2,351 employees in 15 worksites who participated in a year-long worksite health promotion program that offered financial rewards for weight loss. The intervention varied by employer, in some cases offering steady quarterly rewards and in other cases requiring participants to post a bond that would be refunded at year's end conditional on weight loss. Still others received no financial incentives at all and serve as a control group. The authors find far higher attrition in this real-world intervention than has been experienced in similar interventions designed and operated by researchers. Moreover, average weight loss attributable to the financial rewards is small: after one year, it is 1.7 pounds for those who posted a refundable bond and is not significantly different from zero for those facing steady quarterly rewards.

Goldman and his co-authors examine the associations between food prices of various kinds and body weight, for adults age 50 and over in the United States. The authors use the Health and Retirement Study, a longitudinal and nationally representative survey of older Americans, along with data on geographical and temporal variations in food price inside the United States, to identify the associations. They find that doubling the price of calories or the price of fat reduces body weight of low-income persons by 5 to 7 percent. This implies that if food taxes were imposed to reduce caloric intake, a substantial share of the reduction in obesity would occur among the population that currently qualifies for Medicaid.

Powell and Chaloupka examine the relationship between child weight and: the prices of energy-dense foods, such as fast food, versus healthy foods, including fruits and vegetables; the availability of fast food versus full-service restaurants; and access to food outlets, including supermarkets, grocery stores, and convenience stores. The researchers draw on longitudinal data from the Child Development Supplement of the Panel Study of Income Dynamics, combined at the zip-code level with food price data from the American Chamber of Commerce Researchers Association and food-related outlet density data obtained from Dun & Bradstreet. Their results show that higher fruit and vegetable prices are related to a higher body mass index (BMI) among children, with greater effects among those in low socioeconomic status (SES) families. Higher fast food prices are negatively related to child weight only among low-income children. Increased supermarket availability also lowers children's weight outcomes among low-SES children. These results provide evidence of the potential effectiveness of using fiscal pricing interventions, such as taxes and subsidies, and other interventions to improve supermarket access as policies to address childhood obesity.

Sen and co-authors explore whether maternal perceptions of neighborhood quality affect children's bodyweight outcomes and, moreover, whether racial and ethnic differences in such perceptions may explain any of the hitherto unexplained gap in bodyweight and obesity prevalence among whites and minorities. Their results indicate that overall neighborhood quality is not significantly related to children's bodyweight, but one particular characteristic - whether there is enough police protection in the neighborhood - is indeed related. Lack of police protection has robust and significant effects on the children's BMI, although it has less robust effects on the risk of becoming obese per se. Additionally, lack of police protection appears to be associated with children spending more time watching television. Finally, there are differences in perceptions about adequate police protection between whites and minorities that remain after controlling for other socioeconomic factors, and these differences do explain part of the gap in bodyweight between white and minority children.

Sandy and his co-authors use clinical records of successive visits by children at pediatric clinics in Indianapolis to estimate the effects on their body mass of changes in the environment near their homes. The sample is limited to children who resided at the same address before and after the environmental change. The environmental factors are: fast food restaurants, supermarkets, parks, trails, and violent crimes, and 13 types of recreational amenities derived from the interpretation of annual aerial photographs. The researchers' cross-sectional estimates are quite different from their fixed-effects (FE) estimates of the impacts of amenities locating near a child. In the cross section, nearby fast food restaurants are associated with higher BMI and supermarkets with lower BMI. These results are reversed in the FE estimates. The recreational amenities that appear to lower children's BMI are baseball and softball fields, fitness areas, kickball diamonds, and volleyball courts.

Using the Consumer Expenditure Surveys for 1994-2004, Kaushal and Gao study the effect of the Food Stamp Program (FSP) on consumption patterns in families headed by low-educated single mothers in the United States. Their analysis suggests that the food stamp caseload does not have any statistically significant association with per capita expenditure on food in families headed by low-educated single mothers. The researchers find that state and federal welfare reforms during the 1990s lowered the food stamp caseload by approximately 18 percent, and the introduction of the Electronic Benefit Transfer cards and simplified reporting procedures for re-certification of food stamps increased participation by about 7 percent. However, there is no evidence that these policies had any effect on total food expenditure, nor any consistent evidence that the policies affected expenditures on specific food items.

McInnes and Shinogle examine correlates and predictors of physical activity over time with emphasis on economic factors. Using data for adults from the 2000-5 Behavioral Risk Factor Surveillance System (BRFSS) survey, they analyze the characteristics of individuals and their environments that determine their level of activity. Because BRFSS includes state and county codes for each individual, the researchers are able to include additional information regarding economic variables, such as area unemployment, as well as price and supply variables. They find that certain area characteristics -- such as access to gyms, parks, and other recreational facilities -- increase the probability of exercise. It is possible that those people with unobserved tastes for prevention activities, such as physical activity, may choose to live in areas with better access to these facilities. Yet the results persist when the authors attempt to control for this unobserved taste with a dichotomous indicator for the of a flu shot.

Kaestner and his co-authors investigate the association between weight and adolescent educational attainment, as measured by highest grade attended, highest grade completed, and drop out status. Data for this study come from the 1997 cohort of the National Longitudinal Survey of Youth, which contains a large, national sample of teens between the ages of 14 and 18. After controlling for a variety of observed characteristics, the researchers conclude that, in general, teens who are overweight or obese have levels of attainment that are about the same as teens with average weight.

Using data from the 1986 and 1999- 2005 Panel Study of Income Dynamics, Gregory and Ruhm estimate models that allow earnings to vary with BMI in a highly flexible manner. Their results show that, for women, earnings peak at levels far below the clinical threshold of "obesity" or even "overweight." For men, the estimates suggest a reasonably flat BMI-wage profile that peaks early in the "overweight" category. However, the results of instrumental variables (IV) models for the men are more similar to those for women: the findings for females (and the IV estimates for males) suggest that it is not obesity but rather some other factor - such as physical attractiveness - that may be producing the observed relationship between BMI and wages. Using data from the Medical Expenditure Panel Survey, the authors also provide estimates of the association between BMI and health expenditures. These cast further doubt on the hypothesis that the wage penalties associated with increasing BMI occur because the latter serve as an index for underlying medical costs.

Bhattacharya and his co-authors use data from the Rand Health Insurance Experiment, in which people were randomly assigned to varying levels of health insurance, to examine the effect of insurance coverage on body weight along the intensive-coverage margin. Then, they use nonlinear IV methods to estimate the effect of type of insurance coverage (private, public, and none) on body weight, in order to examine the effects of coverage along the extensive margin in the 1989-2004 waves of the National Longitudinal Survey of Youth 1979. They find weak evidence that more generous insurance coverage increases BMI. They find stronger evidence that being insured leads to a greater body mass index and a higher probability of obesity.

Mocan and Tekin find that, among a nationally representative sample of young American adults aged 21 to 26 in 2001-2, body weight has an independent impact on self-esteem after controlling for a host of personal attributes, including education, health status, and test scores. Specifically, being overweight or obese has a negative influence on the probability of having high self-esteem for females (both white and black) and for black males. There is no evidence of an impact of body weight on self-esteem in case of white men. Wages of black men and black women are influenced by their body weight. Although not uniformly statistically significant, there is a wage penalty for being obese, and there is some evidence of a wage penalty for being underweight in case of blacks. Self-esteem has no impact on black wages. The authors' results indicate that for both white men and women, self-esteem has an impact on wages. Having high self-esteem is associated with a 3 percent wage premium. White women's wages also influenced by their bodyweight, while body weight does not affect white men's wages. The results suggest that obesity has the most serious impact on white women's wages, because their wages are affected directly by obesity and indirectly through the impact of obesity on self-esteem, although the magnitude of the wage penalty that emerges through this second channel is small.

These papers will be considered for publication in an NBER Conference Volume by the University of Chicago Press and will be posted at "Books in Progress" on the NBER's website.

[back to top]


National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us