The Economics of School Choice
An NBER Conference on "The Economics of School Choice," organized by Caroline M. Hoxby, Director of the NBER's Program on the Economics of Education, also of Harvard University, took place on February 22-24. The following papers and discussion made up the agenda:
- Eric A. Hanushek, NBER and Stanford University, and Steven G. Rivkin, Amherst College, "Does Public School Competition Affect Teacher Quality?" Discussant: Joseph Altonji, NBER and Northwestern University
- Paul E. Peterson, William G. Howell, Patrick J. Wolff, and David E. Campbell, Harvard University, "School Vouchers: Results from Randomized Experiments" Discussant: Derek Neal, NBER and University of Wisconsin
- Thomas Nechyba, NBER and Duke University, "Introducing School Choice into Multi-District Public School Districts" Discussant: Charles Manski, NBER and Northwestern University
- Caroline M. Hoxby, "School Choice and School Productivity" Discussant: John Chubb, Edison Schools
- Raquel Fernandez, NBER and New York University, and Richard Rogerson, NBER and University of Pennsylvania, "Vouchers: A Dynamic Analysis" Discussant: Ananth Seshadri, University of Wisconsin, Madison
- David Figlio, NBER and University of Florida, and Marianne Page, University of California, Davis, "Can School Choice and School Accountability Successfully Coexist?" Discussant: Helen Ladd, Duke University
- Julie Berry Cullen, NBER and University of Michigan, and Steven G. Rivkin, "The Role of Special Education in School Choice" Discussant: Richard Murnane, NBER and Harvard University
- Dennis N. Epple, NBER and Carnegie Mellon University, and Richard E. Romano, University of Florida, "Neighborhood Schools, Choice and the Distribution of Educational Benefits" Discussant: Michael Kremer, NBER and Harvard University
- Tom Kane, NBER and Harvard University, Jane Hannaway, The Urban Institute, and Chester Finn, The Fordham Foundation
Panel Discussion: The Uses and Abuses of Research on School Choice in the Policy Debate
Under most conceivable scenarios of expanded choice, even with private school vouchers, the public school system will still remain the majority supplier of schooling. Therefore, it is important to know what might happen to quality and outcomes in the remaining public schools. Hanushek and Rivkin first compare estimates of differences in average school quality in metropolitan areas across Texas to the amount of public school competition in each district. At least for the largest metropolitan areas, the degree of competition is related positively to performance of the public schools. Then they investigate the narrower impact of metropolitan area competition on teacher quality. Because teacher quality has been identified as one of the most important determinants of student outcomes, the effects of competition on hiring, retention, monitoring, and other personnel practices may be one of the most important aspects of any force toward improving public school quality. The results, while far from conclusive, suggest that competition raises teacher quality and improves the overall quality of education.
Based on three randomized experiments in New York City, Washington D.C., and Dayton, Ohio, Peterson and his co-authors find that African-American students attending private schools perform an average of 6 national percentile points higher on tests of reading and math achievement after two years than members of a control group remaining in public school. Parents of students in private schools report higher levels of satisfaction, fewer discipline problems, more communication with school, and more student homework than parents in the control group. Participating families are of low-income; the number of cases in each site varies between several hundred and two thousand.
Nechyba seeks to shed light on how school choice policies change the opportunities faced by different types of households and their children. His simulations are derived from a three-district model of low, middle, and high-income school districts (calibrated to New York data) with housing stocks that vary within and across districts. The advantage of this approach is that, rather than starting from an abstract and idealized public school system, it allows the analysis to proceed from a base model that replicates the actual stylized facts that emerge from the data, including public school systems with wide inter-district variations of school quality, communities with housing stocks similar to those observed in the data, and so on. The analysis with respect to school choice is extended in this paper by including consideration of potential school responses to increased competition and by deriving testable and policy implications.
Existing research on school choice has neglected school productivity, yet the effects of competition on productivity may be large enough to swamp any adverse effects that even the least lucky students experience under choice. In this paper, Hoxby shows that as recently as 1970, American public schools' productivity was at least 50 percent higher than it is today. She describes the economic theory that suggests that choice would improve productivity. She then presents empirical evidence on how choice affects school productivity and student achievement, focusing on the effect of recent reforms in Milwaukee, Michigan, and Arizona. Achievement and productivity in public schools increased strongly in response to significant competition from vouchers and charter schools.
Fernandez and Rogerson model family decisionmaking in order to analyze the short-run and long-run effects of various voucher programs. They assume that educational services are provided efficiently, and that parents cannot borrow against a child's future income in order to finance current expenditures on education. In this setting, vouchers have the potential to raise aggregate welfare by allowing poor families to increase their expenditures on education. The authors consider three different types of voucher programs. In the first, everyone receives a voucher of equal value; in the second, only individuals below a certain threshold income receive a voucher. In the third program, the size of the voucher depends on both parents' income and the amount of their private educational expenditures. The authors find that large gains can be realized through implementation of a voucher system. For example, aggregate income of the economy could be increased by more than 5 percent using moderate-sized vouchers.
Several proposals for school voucher systems, including the program currently in place in Florida, tie voucher eligibility to a school's performance on standardized examinations. Figlio and Page consider the question of whether integrating school choice within a system of school accountability is compatible with the goals underlying school choice programs. A traditional justification for vouchers is to provide schooling options for those whose choices are constrained. Using micro-data from Florida, the authors find that when schools are assessed on the basis of average test performance, the students who are eligible for vouchers are overwhelmingly minority or low-income (though less so than if vouchers were directly targeted to low-income households). When value-added test score measures (for example, year-to-year changes in test scores within a group) are used to assess schools and determine voucher eligibility, voucher-eligible students are more representative of the general population. This is particularly true when schools are small. The authors conclude that tying school vouchers to a school accountability system will not serve the set of students for whom vouchers are intended as well as a school program that is separate from an accountability system.
Proponents of school choice claim that all students, both those who take advantage of choice and those who remain in their neighborhood schools, will benefit because schools will be forced to improve in response to competitive pressures. Others fear that only the most advantaged and informed students will opt out to better schools, leaving the more disadvantaged students isolated in the worst schools with declining resources. Among the students who may be left behind are special needs students. Students with disabilities are most costly to educate and therefore may encounter explicit or implicit barriers to attending choice schools. High concentrations of special needs students also may be a "push" factor for other students deciding on schooling options. Cullen and Rivkin explore how these forces operate under a variety of choice programs. The impact of expanded school choice on special education students and programs will depend on the interaction between the legal responsibilities of the institutions involved and the method of finance. The authors describe how these aspects of the special education landscape differ across public schools, charter schools, and private schools. They also review existing evidence on the relative participation of special needs students across choice systems and provide new evidence using student-level longitudinal data from both Texas and Chicago public schools. It appears that any effects of school choice on disabled students' opportunities will depend on the system. Thus, whether other disadvantaged groups are left behind by school choice also will depend critically on the details of the program.
School districts in the United States typically have multiple schools, centralized finance, and student assignment determined by neighborhood of residence. In many states, centralization is extending beyond the district level as states assume an increasing role in the finance of education. At the same time, movement toward increased pubic school choice, particularly in large urban districts, is growing rapidly. Models that focus on community-level differences in tax and expenditure policy as the driving force in determination of residential choice, school peer groups, and political outcomes are not adequate for analyzing multi-school districts and for understanding changing education policies. Epple and Romano develop a model of neighborhood formation and tax-expenditure policies in neighborhood school systems with centralized finance. In equilibrium, stratification across neighborhoods and their schools is likely to arise. The authors characterize the consequences of intra-district choice with and without frictions, including its effects on the allocation of students across schools, tax and expenditure levels, student achievement, and household welfare.
These papers will be published by the University of Chicago Press in an NBER conference volume. Its availability will be announced in a future issue of the NBER Reporter.
Innovation Policy and the Economy
The NBER's second annual Conference on Innovation Policy and the Economy, organized by Research Associates Adam Jaffe of Brandeis University, Joshua Lerner of Harvard Business School, and Faculty Research Fellow Scott Stern of MIT, took place in Washington on April 17. The following papers were discussed:
- David S. Evans, National Economic Research Associates, and Richard Schmalensee, NBER and MIT, "Some Economic Aspects of Antitrust Analysis in New-Economy Industries"
- Nancy Gallini, University of Toronto, and Suzanne Scotchmer, NBER and University of California, Berkeley, "Intellectual Property Rights: An Efficient Mechanism for Rewarding Innovation?"
- Manuel Trajtenberg, NBER and Tel-Aviv University, "Government Support of Commercial R&D: Lessons from the Israeli Experience"
- Timothy Bresnahan, NBER and Stanford University, "Prospects for an IT-Led Productivity Surge"
- J. Bradford DeLong, NBER and University of California, Berkeley, "Do We Have a 'New' Macroeconomy?"
Competition in many important industries centers on investment in intellectual property. Evans and Schmalensee note that sound antitrust economic analysis of such industries involves explicit consideration of dynamic competition. Most leading firms in these dynamically competitive industries have considerable short-run market power, for instance, but may be vulnerable to drastic innovation. Similarly, conventional tests for predation cannot discriminate between practices that increase or decrease consumer welfare in winner-take-all industries. Finally, innovation in dynamically competitive industries often involves adding to the set of features a product provides or improving its existing features.
Intellectual property (IP) is not the American economy's only mechanism for rewarding R and D. Prizes and various types of contract research are also common. Given the controversies that swirl around policies regarding IP, in particular whether it is justified, Gallini and Scotchmer review the economic reasoning that supports patents (or other IP) over funding from general revenue. For those economic environments in which IP is justified, they review some of the arguments for why it is designed as it is, especially with regard to breadth of protection, and especially where innovation is cumulative. The patentee's ability to reorganize rights through licensing and other contractual arrangements should be taken into account in designing the property system, they conclude.
Israel's R and D policies have been highly responsive to changing circumstances, including instituting innovative programs such as a government- sponsored fund to jump start the venture capital market: the "Incubators" program, supporting generic projects conducted by consortia of firms and academic institutions. The Israeli high tech sector has grown remarkably fast since the mid-1980s, and government policies contributed significantly to its success. It seems that the key has been both the willingness of the government to take substantial risks in allocating resources, and flexibility and creativity in responding to rapidly changing needs. Trajtenberg reviews these policies and the challenges that confront them. He also lays out the more general issues and possible lessons for other countries that arise from the Israeli case: how many resources should be devoted to R and D? Is it better to target supply or demand in the market for R and D inputs? What types of support exist for R and D policies, and what is the effect of international spillovers?
Advances in information technology (IT) shift the invention-possibility frontier of the economy, permitting users of IT to invent new and sometimes highly valuable applications. IT is also general purpose technology, shared across a wide variety of uses. Therefore, new advances in IT can have an economy-wide impact which will be larger or smaller according to the degree of sharing. Finally, IT has the possibility of substantial network effects. Together, these three features of IT mean that advances in it can have very substantial effects on long-run growth. The pace of arrival of that growth varies across types of IT according to the value of the enabled applications, the difficulty of the enabled invention, the ease of sharing advances, and the mechanisms for turning network effects into a force for advance rather than for inertia. Analytical studies of earlier IT advances, together with a new model that Bresnahan introduces, suggests that there are two main patterns of the pace of uptake. Current IT advances connected to the Internet seem highly likely to set off both patterns.
DeLong notes that the IT revolution is the prime candidate for driving the acceleration in aggregate labor productivity growth in the 1990s, and the boom in IT investment promises to pay dividends in the form of accelerated aggregate labor productivity growth for at least a decade to come. It is also a credible candidate for driving the reduction in the natural rate of unemployment, the NAIRU. Finally, it may diminish the aggregate economy's vulnerability to inventory fluctuations, which for more than a century have been a principal driving force behind the business cycle.
These papers will appear in an annual volume published by the MIT Press. Its availability will be announced in a future issue of the Reporter.
Sixteenth Annual Conference on Macroeconomics
The NBER's Sixteenth Annual Conference on Macroeconomics took place in Cambridge on April 20-21. Ben S. Bernanke of NBER and Princeton University and Kenneth Rogoff of NBER and Harvard University served as organizers and put together this agenda:
- Ben S. Bernanke and Refet Gurkaynak, Princeton University, "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously"
- Discussants: David Romer, NBER and University of California, Berkeley, and Francesco Caselli, NBER and Harvard University
- Philip Lane, Trinity College Dublin, and Gian Maria Milesi-Ferretti, International Monetary Fund, "Perspectives on International Borrowing and Lending"
- Discussants: Kristin Forbes, NBER and MIT, and Jeffrey Frankel, NBER and Harvard University
- Robert Barsky, NBER and University of Michigan, and Lutz Kilian, University of Michigan, "A Monetary Explanation of the Great Stagflation of the 1970s" (NBER Working Paper No. 7547)
- Discussants: Oliver Blanchard, NBER and MIT, and Alan Blinder, NBER and Princeton University
- Marvin J. Barth III, Federal Reserve Board, and Valerie Ramey, NBER and University of California, San Diego, "The Cost Channel of Monetary Transmission" (NBER Working Paper No. 7675)
- Discussants: Charles Evans, Federal Reserve Bank of Chicago, and Simon Gilchrist, NBER and Boston University
- Xavier Gabaix, MIT, and David Laibson, NBER and Harvard University, "The 6D Bias and the Equity Premium Puzzle"
- Discussants: Anthony Lynch, New York University, and Monika Piazzesi, University of California, Los Angeles
- Tim Cogley, Arizona State University, and Thomas Sargent, NBER and Stanford University, "Evolving Post-World War II Inflation Dynamics"
- Discussants: Christopher Sims, NBER and Princeton University, and James Stock, NBER and Harvard University
Is long-run economic growth exogenous? To address this question, Bernanke and Gurkaynak show that the empirical framework of Mankiw, Romer, and Weil (1992) can be extended to test any growth model that admits a balanced growth path. Their broad conclusion, based on model estimation and growth accounting, is that long-run growth is significantly correlated with behavioral variables such as savings rates and population growth rates, and that this correlation is not explained easily by models (such as the Ramsey model) in which growth is treated as the exogenous variable. Hence, future research should focus on models that exhibit endogenous growth.
International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, Lane and Milesi-Ferretti show that a small set of fundamentals --shifts in relative output levels, the stock of public debt, and demographic factors -- can do much to explain the evolution of net foreign asset positions. In addition, they highlight that "external wealth" plays a critical role in determining the behavior of the trade balance, through shifts in the desired net foreign asset position and the investment returns generated on the outstanding stock of net foreign assets. Finally, they provide some evidence that a "portfolio balance" effect exists: real interest rate differentials are related inversely to net foreign asset positions.
Barsky and Kilian argue that the major oil price increases of 1973-4 and 1979-80 were not nearly as essential a part of the causal mechanism generating stagflation as is often thought. They show that monetary expansions and contractions can explain stagflation without reference to supply shocks. Monetary fluctuations help to explain movements in the prices of oil and other commodities, including the surge in the prices of non-oil industrial commodities that preceded the 1973-4 oil price increase. These fluctuations also can account for the striking coincidence of major oil price increases and worsening stagflation. In contrast, there is no theoretical presumption that oil supply shocks are stagflationary. The authors show that oil supply shocks may quite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocks actually raised the deflator (as opposed to the CPI).
Barth and Ramey show that the "cost channel" may be an important part of the monetary transmission mechanism. First they highlight three puzzles that might be explained by a cost channel of monetary transmission. Then they provide evidence on the importance of working capital and argue why monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. Next they investigate the effects across industries. Following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock. These effects are noticeably more pronounced during the period before 1979.
If decision costs lead agents to update consumption every D periods, then high-frequency data will exhibit an anomalously low correlation between equity returns and consumption growth (Lynch 1996). Gabaix and Laibson analytically characterize the dynamic properties of an economy composed of consumers who have such delayed updating. In their setting, an econometrician using an Euler equation procedure would infer a coefficient of relative risk aversion biased up by a factor of 6D. Hence with quarterly data, if agents adjust their consumption every D = 4 quarters, the imputed coefficient of relative risk aversion will be 24 times greater than the true value. The neoclassical model with delayed adjustment explains the consumption behavior of shareholders. Once limited participation is taken into account, the model matches the high-frequency properties of aggregate consumption and equity returns.
These papers will be published by the MIT Press as NBER Macroeconomics Annual, Volume 16.
Globalization in Historical Perspective
An NBER Conference on "Globalization in Historical Perspective," organized by Michael D. Bordo, NBER and Rutgers University, Alan M. Taylor, NBER and University of California, Davis, and Jeffrey G. Williamson, NBER and Harvard University, took place on May 4 and 5 in California. The following topics were discussed:
- Ronald Findlay, Columbia University, and Kevin O'Rourke, NBER and Trinity College, Dublin, "Commodity Market Integration, 1500-2000"
- Discussant: Douglas Irwin, NBER and Dartmouth College
- Barry Chiswick, University of Illinois, Chicago, and Timothy Hatton, University of Essex, "International Migration and the Integration of Labor Markets"
- Discussant: Riccardo Faini, International Monetary Fund
- Maurice Obstfeld, NBER and University of California, Berkeley, and Alan M. Taylor, "Globalization and Capital Markets"
- Discussant: Richard Portes, NBER and London Business School
- J. Bradford DeLong, NBER and University of California, Berkeley, and Steven Dowrick, Australian National University, "Globalization and Convergence"
- Discussant: Charles Jones, NBER and Stanford University
- Peter H. Lindert, University of California, Davis, and Jeffrey G. Williamson, "Does Globalization Make the World More Unequal?"
- Discussant: Lant Pritchett, Harvard University
- Nicholas Crafts and Anthony Venables, London School of Economics, "Globalization and Geography: An Historical Perspective"
- Discussant: Richard Baldwin, NBER and University of Geneva
- Gregory Clark, University of California, Davis, and Robert Feenstra, NBER and University of California, Davis, "Technology in the Great Divergence"
- Discussant: Joel Mokyr, Northwestern University
- Peter L. Rousseau, NBER and Vanderbilt University, and Richard E. Sylla, NBER and New York University, "Financial Systems, Economic Growth, and Globalization"
- Discussant: Charles Calomiris, NBER and Columbia University
- Michael D. Bordo, and Marc Flandreau, Observatoire Francais des Conjonctures Economiques, "Core, Periphery, Exchange Rate Regimes, and Globalization"
- Discussant: Anna Schwartz, NBER
- Larry Neal, University of Illinois, Urbana-Champaign, and Marc Weidenmier, Claremont McKenna College, "The Global Economy in Crises: How the Gold Standard Absorbed Shocks, 1880-1914"
- Discussant: Mark Taylor, University of Warwick
- Barry Eichengreen, NBER and University of California, Berkeley, and Harold James, Princeton University, "Monetary and Financial Reform in Two Eras of Globalization (and In Between)"
- Discussant: Peter Kenen, Princeton University
- Round Table Discussion: Costs versus Benefits of Globalization
- Chair: Peter Kenen; Clive Crook, The Economist; Gerardo Della Paolera, Universidad Torcuato di Tella; Niall Ferguson, Oxford University; Anne O. Krueger, NBER and Stanford University; and Ronald Rogowski, University of California, Los Angeles.
Findlay and O'Rourke discuss trends in international commodity market integration during the second half of the second millennium. Their focus is on intercontinental trade, because the emergence of large-scale trade between the continents has especially distinguished the centuries following the voyages of Da Gama and Columbus. For earlier centuries, they rely more on qualitative information regarding trade routes, and information about quantity in terms of the volumes of commodities actually traded. For later centuries, they switch to more systematic price-based evidence. Among the main themes of the paper is the growing number of goods traded between continents over time (from high value-added to bulk commodities) and substantial commodity market integration, driven by technology (in the late nineteenth century) and politics (in the late twentieth century). However, this trend toward integration was notmonotonic: politics can reinforce or offset the impact of technology, and shocks such as wars and Great Depressions can have long-run effects (through politically induced hysteresis). Finally, the authors conclude that remarkably little is known about commodity market integration trends in the twentieth century.
Chiswick and Hatton describe the determinants and consequences of intercontinental migration. They begin with a review of the history of primarily trans-Atlantic migration to the New World over the last four centuries. The contract and coerced migration from Europe and Africa beginning in the eighteenth century gave way to an era of free European migration. The period of 1850 to 1913 was one of mass migration, primarily from Europe to North America and Oceania. World wars, immigration restrictions, and the Great Depression resulted in low international migration from 1913 to 1945. After World War II, international migration increased sharply, but with changes in the nature of the flows, and under the constraints of immigration controls. Why this international migration? Important explanatory factors include: the relative wages in the origin and destination; the cost of international migration; the wealth to finance the investment; chain migration (kinship and information networks); and government imposed restrictions on the free flow of people. The authors find that the influence of gainers and losers from immigration on policy was mediated by institutional change and by interest group politics.
Obstfeld and Taylor examine the development of international capital mobility since the start of the late nineteenth century's gold standard era. They document the vicissitudes in the international capital market over more than a century, explaining them in terms of the open-economy "trilemma" that policymakers face in choosing among open capital markets, domestic monetary targets, and the exchange rate regime. They then examine a wide array of new evidence, including data on gross asset stocks, interest-rate arbitrage, real interest differentials, and equity-return differentials. On all measures examined, the degree of international capital mobility appears to follow a rough U-shaped pattern: high before world War I, low in the Great depression, and high today. While it is difficult to definitively settle the debate over whether global capital mobility is greater today than it was on the eve of World War I, and thus no such attempt is made in the paper, the authors find that world capital may have flowed more easily to the poorer countries before 1914 than it does today.
At the biggest picture level, the economic history of the twentieth century is dominated by three things: the tremendous explosion in technological knowledge, capital accumulation, and worker skills that have made the world today so much richer than the world of previous centuries; the rise in worldwide relative "divergence" as the industrialized core of the world economy has pulled away from the non-industrialized periphery; and the changing membership of the world economy's core, as the southern cone of South America emerges as the big relative loser while Pacific East Asia and southern Europe emerge as the big relative winners of the past century. DeLong and Dowrick's analysis of the growth performance of 106 countries between 1960 and 1980 confirms the findings of Sachs and Warner (1995) of convergence within the group of countries that was open to trade and capital flows. They are intrigued to find that the result is reversed when they examine growth performance between 1980 and 1988: openness still produces a growth premium, but it is more pronounced for the richer economies.
Virtually all of the observed rise in world income inequality over the last two centuries has been driven by widening gaps between nations, while almost none of it has been driven by widening gaps within nations. Meanwhile, the world economy has become much more globally integrated over the past two centuries. If correlation meant causation, then these facts would imply that globalization has raised inequality between nations, but it has had no clear effect on inequality within nations. Lindert and Williamson argue that the likely impact of globalization on world inequality has been very different from what these simple correlations suggest. Globalization probably mitigated rising inequality between participating nations. The nations that gained the most from globalization are those poor ones that changed their policies to exploit it, while the ones that gained the least did not, or were too isolated to do so. The effect of globalization on inequality within nations has gone both ways, but here too those who have lost the most from globalization typically have been the excluded non-participants. In any case, the net impact of globalization was far too small to explain the observed long-run rise in world inequality.
Most traditional analysis is based on economic models in which there are diminishing returns to most activities. Crafts and Venables propose in this paper that it is not possible to interpret several of the most important aspects of nineteenth century economic development in such a framework. One alternative framework is provided by models of "new trade theory" and "new economic geography" in which market imperfections at the micro level can give rise to increasing returns at a more aggregate level. The interaction between increasing and decreasing returns in these models depends crucially on spatial interactions, so changes in these interactions can have major effects. Globalization can trigger cumulative causation processes that cause uneven development to occur at a variety of different spatial levels: urban, regional, and international. The authors' objective in this paper is to apply this new approach to several aspects of the historical experience of globalization.
Clark and Feenstra examine the changes in per-capita income and productivity from 1700 to modern times, and show four things: 1) incomes per capita diverged more around the world after 1800 than before; 2) the source of this divergence was increasing differences in the efficiency of economies; 3) these differences in efficiency were not attributable to problems of poor countries in getting access to the new technologies of the Industrial Revolution; and 4) the pattern of trade between the poor and the rich economies from the late nineteenth century suggests that the problem of the poor economies was peculiarly a problem of employing labor effectively. This continues to be true today.
Rousseau and Sylla bring together two strands of the economic literature -- on the finance growth nexus and capita market integration -- and explore key issues surrounding each strand through both institutional/country histories and formal quantitative analysis. Historical accounts of the Dutch Republic, England, the United States, France, Germany, and Japan spanning three centuries demonstrate that in each case the emergence of a financial system jump-started modern economic growth. Using a cross-country panel of 17 countries covering 1850-1997, the authors uncover a robust correlation between financial factors and economic growth that is consistent with a leading role for finance. They show that these effects were strongest over the 80 years preceding the Great Depression. Then, by identifying roles for both finance and trade in the convergence of interest rates among the Atlantic economies in the prewar period, they show that countries with more sophisticated financial systems tended to engage in more trade and appeared to be better integrated with other economies. Their results suggest that both the growth and the increasing globalization of these economies depend on improvements in their financial systems.
Bordo and Flandreau focus on the different historical regime experiences of the core and the periphery. Before 1914, advanced countries adhered to gold while periphery countries either emulated the advanced countries or floated. Some peripheral countries were especially vulnerable to financial crises and debt default, in large part because of their extensive external debt obligations denominated in core country currencies. This left them with the difficult choice of floating but restricting external borrowing or devoting considerable resources to maintaining an extra hard peg. Today, while advanced countries can successfully float, emergers who are less financially mature and must borrow abroad in terms of advanced country currencies are afraid to float for the same reason as their nineteenth century forebearers.
To obtain access to foreign capital, they may need a hard peg to the core country currencies. Thus the key distinction between core and periphery countries both then and now, emphasized in this paper, is financial maturity as evidenced in the ability to issue international securities denominated in domestic currency. Evidence from gravity equation across several regimes since 1880 suggests that exchange rate volatility was not a significant detriment to bilateral trade. While adhering to gold was associated with greater trade, this result seems to be explained by deeper institutional forces at work. Evidence from Feldstein-Horioka tests over the same span of history agrees with the "folk" wisdom that financial integration was high before 1914 just as it is today. But the evidence suggests that it was not the exchange rate regime that mattered but the presence of capital controls. Finally, the authors' empirical evidence for core and peripheral countries in 1880-1913 and today, based on traditional money demand regressions, suggests a strong link between financial depth and the exchange rate regime.
The first global financial market appeared in Europe with the near-universal adoption of the gold standard from 1880 to 1914. During this period, a number of financial crises struck at the various financial centers and reverberated through the system of fixed exchange rates to other centers. Nevertheless, the financial system remained intact and the European commitment to the gold standard actually strengthened throughout the period. Neal and Weidenmier analyze the shock absorption characteristics of the system with weekly data on exchange rates and short-term interest rates. The data capture the relative importance of price adjustments in the current account and the short-term capital account for each country during the successive crises. The authors conclude that gold inflation from 1897 to mid-1914 helped to sustain the stability of the system, while the deflationary period from 1880-1896 required countries to adjust short-term interest rates if they were to maintain credible commitment to the gold standard. Countries unable to do this had to abandon or forgo the standard during the deflationary period (Austria, Italy, Portugal, Spain), but were able to shadow it during the inflationary period after 1897 without formally committing, or by committing with protective safeguards. These cautionary commitments, by reducing competition for monetary gold, also helped sustain the gold standard's financial architecture.
Eichengreen and James review the history of international monetary and financial reform in the two eras of globalization, the late nineteenth century and the late twentieth century, and in the period in between. That history is rich, varied, and difficult to summarize compactly. Therefore, the authors structure the narrative by organizing it around a specific hypothesis. That hypothesis is that a consensus on the need for monetary and financial reform is apt to develop when such reform is seen as essential for the defense of the global trading system. In most periods, the international monetary and financial system evolves in a gradual and decentralized manner, largely in response to market forces. The shift toward greater exchange rate flexibility and capital account convertibility since 1973 is the most recent and therefore the most obvious illustration of what is a more general point. Discontinuous reform at a more centralized level - that is, reforms agreed to and implemented by groups of governments - occurs only when problems in the monetary and financial system are seen as placing the global trading system at risk. Throughout the period considered, there has existed a deep and abiding faith in the advantages of trade for economic growth, the principal exception being the 1930s, when trade and prosperity came to be seen as at odds. Consequently, priority has been attached to reform in precisely those periods when monetary and financial problems are perceived as posing a threat to the global trading system and hence to growth and prosperity generally. In contrast, there has never existed a comparable consensus on the benefits of open international capital markets for stability, efficiency, and growth. It follows that disruptions to capital markets that do not also threaten the trading system have had less of a tendency to catalyze reform.
Finally, "A Round Table on the Costs and Benefits of Globalization" was chaired by Peter Kenen of Princeton University. Clive Crook considered the possibility that the process of globalization would be reversed because of a popular fear of economic insecurity, falling real wages among the unskilled, and the incorrect perception that poverty in the Third World would be worsened. Gerardo Della Paolera considered globalization from the perspective of transition countries like his own (Argentina). He raised the question of whether the perceived benefits of furthering the process exceeded the costs for countries like Argentina. Niall Ferguson considered the "big think" issues of political globalization, empires, wars, and the democratization in the context of the long sweep of world history. Anne Krueger discussed the connection between globalization and economic policy in developing countries. Ronald Rogowski concluded the panel by assessing directly the costs and benefits. He argued that globalization was likely to continue in the advanced countries because median voters are net winners but that policies to compensate the losers will continue to be important.
These papers and discussions will be published by the University of Chicago Press in an NBER Conference Volume. Its availability will be announced in a future issue of the NBER Reporter.
Labor in the Global Economy
An NBER-Universities Research Conference on "Labor in the Global Economy" took place in Cambridge on May 11 and 12. Labor Studies Program Director Richard Freeman, NBER and Harvard, was the organizer. Eli Berman, NBER and Boston University, and Morris M. Kleiner, NBER and University of Minnesota, were moderators. The program was:
- Andrew B. Bernard, NBER and Dartmouth College, J. Bradford Jensen, University of Maryland, and Peter K. Schott, Yale University, "Factor Price Equality and the Economies of the United States" (NBER Working Paper No. 8068)
- Discussant: Eli Berman
- Dae-Il Kim, Seoul National University, and Peter Mieszkowski, Rice University, "The Effects of International Trade on Wage Inequality in the United States"
- Discussants: Bernardo S. Blum, University of California, Los Angeles, and Eli Berman
- Linda Goldberg and Joseph Tracy, Federal Reserve Bank of New York, "Exchange Rates and Wages" (NBER Working Paper No. 8137)
- Discussant: Lori Kletzer, University of California, Santa Cruz
- James P. Smith, Duncan Thomas, Elizabeth Frankenberg, Kathleen Beagle, and Graciela Teruel, RAND,
- "Wages, Employment, and Economic Shocks: Evidence from Indonesia"
- Discussants: David E. Bloom, NBER and Harvard University, and John R. Harris, Boston University
- Belton M. Fleisher and Xiaojun Wang, Ohio State University, "Skill Differentials, Returns to Schooling, and Market Segmentation in a Transition Economy: The Case of Mainland China"
- Discussant: Gary H. Jefferson, Brandeis University
- Chang-Tai Hsieh, Princeton University, and Keong T. Woo, KPMG "The Impact of Outsourcing to China on Hong Kong's Labor Market"
- Discussant: Jeffrey H. Bergstrand, University of Notre Dame
- Ju-Ho Lee, Korea Development Institute; Young-Kye Moh, Ohio State University; and Dae-Il Kim, Seoul National University "Do Unions Inhibit Labor Flexibility? Lessons from Korea"
- Discussant: David L. Lindauer, Wellesley College
- Andrew M. Warner, Harvard University, "International Wage Determination and Globalization"
- Discussants: Malcolm Cohen, University of Michigan, and Peter Gottschalk, Boston College
- Gary Fields, Paul Cichello, David Newhouse, and Samuel Frieje, Cornell University; and Marta Menendez, DELTA, "A Four Country Story" Household Income Dynamics in Indonesia, South Africa, Spain, and Venezuela"
- Discussants: Peter Gottschalk and John R. Harris
- Morris M. Kleiner, and Hwikwon Ham, University of Minnesota, "Do Industrial Relations Institutions Affect Economic Efficiency?: International and U.S. State-level Evidence"
- Discussant: Takao Kato, Colgate University
Bernard, Jensen, and Schott consider the role of international trade in shaping the product mix and relative wages for regions within the United States. They ask whether all the regions in the United States face the same relative factor prices. Using data from 1972-92, they conclude that all regions do not face the same relative factor prices; rather, there are at least three distinct factor price cones. Sorting regions into cones with similar relative factor prices, the authors find that industry mix varies systematically across the groups. Regions that switch cones over time have more churning of industries.
Kim and Mieszkowski develop several simple general equilibrium models to analyze the effects of increased international trade on the growth of income inequality that occurred in the United States during the 1970s and 1980s. They conclude that the expansion of trade has decreased the real wage of unskilled labor by between 1 and 3 percent, a relatively small amount. To obtain this estimate, they develop a new measure of skill based on information found in the Directory of Occupational Titles. This skill index and data from the Occupational Employment Survey and Input-Output Information are used to calculate three factor shares for two tradable and two non-tradeable sectors.
Understanding the effects of exchange rate fluctuations across the population is important for increasingly globalized economies. Previous studies using industry aggregate data found that industry wages are significantly more responsive than industry employment to exchange rate changes. Goldberg and Tracy offer an explanation for this paradoxical finding. Using Current Population Survey data for 1976 through 1998, they show that the main mechanism for exchange rate effects on wages occurs through job turnover; this has strong consequences for the wages of workers undergoing such job transitions. By contrast, workers who remain with the same employer experience little if any wage impacts from exchange rate shocks. In addition, the least educated workers - who also have the most frequent job changes - shoulder the largest adjustments to exchange rates.
After more than a quarter century of sustained economic growth, Indonesia was struck in the late 1990s by a large and unanticipated crisis. Real GDP declined by about 12 percent in 1998. Using 13 years of annual labor force data in conjunction with two waves of a household panel, the Indonesia Family Life Survey (IFLS), Smith and his co-authors examine the impact of the crisis on labor market outcomes. Aggregate employment has remained remarkably robust, although there has been significant switching within sectors. The drama of the crisis lies in real hourly earnings, which collapsed by around 40 percent in one year for urban workers, both male and female, in the market sector or self-employed. Declines of the same magnitude occurred for females in the rural sector and rural males working for a wage. In stark contrast, real hourly earnings of self-employed males in rural areas remained essentially stable. Given that these workers account for about one quarter of the male work force in Indonesia, any conclusions about the effects of the crisis that focus only on the market wage sector substantially overstate the magnitude of the crisis. The authors estimate that declines in real household incomes are about half the magnitude of the declines in individual hourly earnings, indicating that households have adopted an array of strategies to mitigate the effects of the crisis.
Fleisher and Wang address the puzzle of persistent low private returns to schooling in China's transition to a market economy. They find that both urban and rural enterprises overpay production workers relative to a profit-maximizing standard and that underpayment is far more extreme for skilled workers. This relatively large "exploitation" of skilled workers explains, in a proximate sense, the low private return to schooling. The circumstances of factor payments in rural enterprises are further complicated by the existence of unexploited scale economies which preclude paying all inputs the value of their marginal products. Both production and technical/managerial workers in rural collectives act as de facto residual claimants; that is, the gap between their production value and their pay is related positively to estimated economies of scale. The authors attribute the existence of unexploited scale economies and the residual underpayment of labor to segmented product and factor markets and to constraints on funds that can be invested.
After decades of autarky, China opened its economy to foreign investors in the late 1970s and early 1980s. Hsieh and Woo examine the impact of the resulting outsourcing of production from Hong Kong to China on Hong Kong's labor market. They show that the relative demand for skilled workers in Hong Kong increased sharply at exactly the same time that outsourcing to China began to increase in the early 1980s. Rapid skill upgrading within detailed industries in the manufacturing sector accounts for most of the growth in the relative demand for skilled workers, but plays a much less important role in the non-manufacturing sector. Using several measures of outsourcing to China, the authors show that the rate of skill upgrading has been greater in industries with a greater degree of outsourcing to China. These measures of outsourcing account for 45 to 60 percent of the shift in the relative demand for skilled workers.
Lee, Moh, and Kim examine whether and to what extent unions inhibit labor flexibility in Korean manufacturing. In Korea there was an abrupt incidence of active unionism unleashed in 1987. The authors show that the short-run employment adjustment (one to six months) and hours adjustment (one month) of regular manufacturing workers decreased in the post-1987 period as compared to the pre-1987 period. However, negative union effects on employment adjustment were limited to male, production, and regular workers; Korean employers responded through increased employment of daily workers (workers with employment contracts shorter than one month) and aged workers (55 or older) and also through the higher flexibility of female workers. Furthermore, a significant part of the decrease in employment flexibility (for instance, 35 percent of the decrease in one month output elasticity of employment) is attributable to labor market changes: a tighter labor market with fewer young workers made separation more procyclical.
Warner examines international wage determination using data on wages and salaries for the year 1998. Across countries, wage levels are correlated strongly with local GDP per worker, but the strength of the relationship depends on the extent of foreign language knowledge of managers and varies by occupation. Holding constant GDP per worker, wages also are correlated with the intensity of local competition, and lower wages with minimum wage rules. Across companies, holding constant national differences, wage levels are correlated with: export orientation and multinational status, but the latter only in poorer countries; size of company worldwide, but not domestically; recent revenue growth, but not recent profit performance; E-mail use; and economic sector. Global forces impinge on wages though a number of channels but generally have stronger impacts on executive salaries than on wages in lower-paying occupations.
Fields and his co-authors use panel data to analyze household income mobility in both monetary and welfare terms in four different economies: Indonesia, Spain, South Africa, and Venezuela. They confirm that during the 1990s households in all four countries experienced large income changes, and they examine the characteristics and events of household that are associated with upward and downward income mobility.
Kleiner and Ham examine the impact of national levels of unionization, strikes, bargaining structure, public policies toward labor, and collective bargaining within the firm and nation on a country's foreign direct investment (FDI). As an additional test of the impact of labor market institutions and state labor market policies, they examine its effect on the economic growth of U.S. states. Initially they model the decisions of firms, and then nations, as they decide their trade-offs of social equity and economic efficiency. Using data from 20 OECD nations from 1985 through 1995, and from U.S. states for 1990 to 1999, they show that higher levels of industrial relations institutions are usually associated with lower levels of FDI and slower economic growth for U.S. states. However, within the context of industrial relations policies, their results do not necessarily suggest that a nation or state would be better off trading social equity for higher levels of economic efficiency.
The Economics of Aging
The NBER's Program on Aging, directed by David A. Wise of NBER and Harvard University, held its most recent in a series of conferences on May 17-20. The following papers, which will be published by the University of Chicago Press in an NBER Conference Volume, were presented:
- James M. Poterba, NBER and MIT, Steven F. Venti, Dartmouth College and NBER, and David A. Wise, Harvard University, "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro and Micro Evidence"
- Discussant: Sylvester Scheiber, Watson Wyatt Worldwide
- James J. Choi and David Laibson, NBER and Harvard University; Brigitte Madrian, NBER and University of Chicago; and Andrew Metrick, University of Pennsylvania, "For Better or Worse: Default Effects and 401(k) Savings Behavior"
- Discussant: James M. Poterba
- Jeffrey R. Brown, NBER and Harvard University, and Scott J. Weisbenner, University of Illinois, "Is a Bird in the Hand Worth More Than a Bird in the Bush? Intergenerational Transfers and Savings Behavior"
- Discussant: Alan J. Auerbach, NBER and University of California at Berkeley
- James Banks and Richard Blundell, University College London, and James P. Smith, RAND Corporation, "Wealth Portfolios in the UK and the US"
- Discussant: John B. Shoven, NBER and Stanford University
- Steven F. Venti and David A. Wise, "Aging and Housing Equity: Another Look"
- Discussant: Jonathan S. Skinner, NBER and Dartmouth College
- Michael D. Hurd, NBER and RAND Corporation, Daniel L. McFadden, NBER and University of California at Berkeley; Angela Merrill, Mathematica, and Tiago Ribiero, University of California at Berkeley, "Healthy, Wealthy, and Wise: The Evidence from AHEAD Wave 3"
- Discussant: John P. Rust, NBER and Yale University
- David M. Cutler, NBER and Harvard University, and Ellen Meara, Harvard University, "Changes in the Age Distribution of Mortality Over the 20th Century"
- Discussant: David Meltzer, NBER and University of Chicago
- Victor R. Fuchs and Mark B. McClellan, NBER and Stanford University, "Area Differences in Utilization of Medical Care and Mortality Among U.S. Elderly"
- Discussant: Joseph P. Newhouse, NBER and Harvard University
- Anne Case, NBER and Princeton University, "Does Money Protect Health Status? Evidence from South African Pensions"
- Discussant: Robert T. Jensen, NBER and Harvard University
- Robert T. Jensen, "Socioeconomic Status, Nutrition, and Health Among the Elderly"
- Discussant: David M. Cutler
- Angus S. Deaton and Christina Paxson, NBER and Princeton University, "Mortality, Income, and Income Inequality among British and American Cohorts"
- Discussant: James Banks
Poterba, Venti, and Wise use both macro and micro data to describe the change in retirement assets and in retirement savings that is attributable to the shift over the last two decades from employer-managed defined benefit (DB) pensions to retirement plans that are largely managed and controlled by employees. They pay particular attention to the possible substitution of pensions assets in one plan for assets in another plan, especially the substitution of 401(k) assets for DB assets. The macro data show that between 1975 and 1999 assets to support retirement increased about five-fold relative to wage and salary income, suggesting large increases in the wealth of future retirees. Retirement plan contributions, as well as favorable rates of return in the 1990s, explain the large increase in retirement plan assets. The micro data show no evidence that the accumulation of 401(k) assets has been offset by a reduction in DB assets. Because annual saving is much greater under 401(k) than under DB plans, and because of the market return advantage of 401(k) plans, assets at retirement typically would be much higher under a 401(k) plan than under a DB plan. In addition, a large fraction of 401(k) enrollees retained DB coverage, further increasing their retirement saving.
In the last several years, dozens of employers have automatically enrolled new employees in the company 401(k) plan. Choi, Laibson, Madrian, and Metrick analyze three years of 401(k) data from two firms that have experimented with automatic enrollment. They find that automatic enrollment has a dramatic effect on retirement savings behavior. Under automatic enrollment, 401(k) participation rates exceed 85 per cent. In addition, 80 percent of all participants initially accept both the default savings rate (2 or 3 percent for these two companies) and the default investment fund (stable value or money market). Even after three years, over half of participants continue to contribute at the default rate and invest their contributions in the default fund. Automatic enrollment thus encourages participation, but appears to anchor participants to a low default savings rate and in a conservative default investment vehicle. Higher participation raises average wealth accumulation, but low savings rates and conservative investments undercut accumulation. In this sample, the two effects are roughly offsetting. However, automatic enrollment has a large impact on the distribution of 401(k) balances. Under automatic enrollment, few employees have low (that is, zero) balances, because most employees are anchored at the default choices.
Brown and Weisbenner provide new evidence on the decomposition of aggregate household wealth into life-cycle and transfer wealth. Using the 1998 Survey of Consumer Finances, they find that transfer wealth accounts for approximately one-fifth to one-quarter of aggregate wealth, suggesting a larger role for life-cycle savings than some previous estimates. Despite the smaller aggregate level of transfer wealth, its concentration among a small number of households suggests that it can still have an important effect on the savings decisions of recipients. One estimate suggests that past receipts of transfer wealth reduce life-cycle savings by as much as dollar-for-dollar, while expected future transfers do not produce such a crowd-out effect.
Banks, Blundell, and Smith document and attempt to explain differences between the United States and United Kingdom household wealth distributions, emphasizing the quite different portfolios held in stock and housing equities in the two countries. They show that, as a proportion of total wealth, British households hold relatively small amounts of financial assets - including equities in stock - compared to their American counterparts. In contrast, British households appear to move into home ownership at relatively young ages; consequently, a large fraction of their household wealth is concentrated in housing. Moreover, important changes have been taking place in both countries in their housing and equity markets. Especially in Britain, there have been some fundamental changes in national policies that have been aimed at encouraging wider rates of home ownership and greater participation in the equity market. Institutional differences between the countries imply much younger homebuyers in the United Kingdom than in the United States. The authors argue that the higher housing price volatility in the U.K. combined with much younger entry into home ownership there helps to explain the relatively small participation of young British householders in the stock market. It is important to acknowledge the dual role in housing - providing both wealth and consumption services - in understanding differences in wealth accumulation between the United States and the United Kingdom. As a result, institutional differences , particularly in housing markets, that affect the demand and supply of housing services, turn out to be important in generating portfolio differences between the two countries.
Aside from Social Security and, for some, employer-provided pensions, housing equity is the principle asset of a large fraction of older Americans. Many retired persons have essentially no financial assets to support retirement consumption. Nonetheless, Venti and Wise find that housing equity is typically not withdrawn to support non-housing consumption during retirement. In fact, in the absence of the death of a spouse or entry of a family member into a nursing home, families are unlikely to discontinue home ownership. Even in the event of these precipitating shocks, giving up a home is the exception and not the rule. Families that move and purchase a new home tend to increase home equity. However, income-poor and house-rich families are more likely to reduce equity when they move, while house-poor and income-rich households are more likely to increase housing equity. On balance, households that move and buy a new home substantially increase housing equity. Venti and Wise conclude that home equity is typically not liquidated to support general non-housing consumption needs as households age.
Hurd, McFadden, Merrill, and Ribiero use the Asset and Health Dynamics of the Oldest Old (AHEAD) Panel to test for the absence of causal links from socio-economic status (SES) to innovations in health or mortality, and from health conditions to innovations in wealth. They conclude that there is no causal link from SES to mortality or to the incidence of sudden onset health conditions (accidents and, probably, acute conditions), but there is an association of SES with the incidence of gradual onset health conditions (mental conditions and, probably, degenerative and chronic conditions), either because of causal links or persistent unobserved behavioral or genetic factors that have a common influence on both SES and innovations in health. The authors conclude that there is no causal link from health status to innovations in wealth.
Since 1960, reductions in mortality have been associated with two new factors: the conquest of cardiovascular disease in the elderly, and the prevention of death attributable to low birth weight infants. While it is not entirely clear what factors account for the reduction in cardiovascular disease mortality, the traditional roles of nutrition, public health, and antibiotics are certainly less important than factors related to individual behavior, such as smoking and diet and high tech medical equipment. Cutler and Meara term this change the "medicalization" of death: increasingly, reductions in mortality are attributed to medical care and not to social or environmental improvements. The medicalization of death does not imply that medicine is the only factor influencing mortality. For several important causes of death, improvements in income and social programs have had and continue to have a large impact on mortality. For example, Medicare probably has a direct impact on mortality by increasing elderly access to medical care, but it also may have important effects on income since it reduces out-of-pocket spending by the elderly for medical care. Social Security and civil rights programs also may be important in better health. The authors quantify the role of medicine, income, social programs, and other factors in improved mortality in the last half century, but they show examples of where each is important, as a first step in this research process.
Fuchs and McClellan examine 314 United States areas for differences in medical care utilization and mortality among whites ages 65-84 in 1990. The seven regions and five groups are based on population size. The authors find that cross-area variation in utilization is strongly related to variation in mortality. For total utilization, the elasticity ranges between 0.51 and 0.82 (standard errors are about 0.10) after controlling for region, population size of area, education, income, and income inequality. These are lower-bound estimates; the true coefficients would be larger to the extent that there is a negative relationship running from utilization of care to mortality. The elasticities are especially large for medical admissions, and especially small for physicians' diagnostic services and treatments. Also noteworthy is the extent to which the well-known propensity for higher utilization in Florida appears even larger after controlling for socioeconomic variables and mortality. The coefficient for Florida is, on average, over 50 percent (9 percentage points) higher when the other variables are considered. A third result worthy of comment is the much higher utilization in areas of over 500,000 population relative to all other areas. The average differential is about 8 percent. Among the other areas there is no strong pattern related to population size. The authors find no support for the hypothesis that mortality and income inequality are positively related. The coefficient for inequality is actually negative and significantly different from zero. Nor do they find a relationship between mortality and population size. They do find a very large negative coefficient for Florida: this region has by far the lowest mortality of any region regardless of whether or not other variables are controlled for.
Case quantifies the impact on health status of a large, exogenous increase in income - that associated with the South African state old age pension. Elderly Black and Coloured men and women who did not anticipate receiving large pensions in their lifetimes, and who did not pay into a pension system, are currently receiving more than twice the median Black income per capita. These elderly men and women generally live in large (three or four or five generation) households, and this paper documents the effects of the pension on the pensioners, on other adult members of their households, and on the children who live with them. Case finds, in households that pool income, that the pension protects the health of all household members, working in part to protect the nutritional status of household members, in part to improve living conditions, and in part to reduce the stress under which the adult household members negotiate day-to-day life. The health effects of delivering cash provide a benchmark against which other health-related interventions can be evaluated.
Jensen applies data from a nationally representative household-level survey to explore the relationship between health and socioeconomic status (SES) for the elderly in Russia. His objectives are to explore the basic relationship and to present evidence from a variety of measures of health status, including measurements of blood pressure, weight and height conducted by trained enumerators, as well as nutrient intake, derived from 24- and 48-hour food intake diaries. Therefore, he need not rely exclusively on self-reports of health status, where response choices may have different interpretations for different people (as in self-reported overall health status), or where there may be problems of differential reporting by SES (for example, because of differential knowledge or awareness of health conditions). He uses the data to show that the relationship between health and SES in Russia can't be adequately described by simple statements such as: the poor are less healthy than the rich. On net, the rich are healthier than the poor in some overall sense, but there are important ways in which the rich face greater health risks. Jensen also focuses on one particular mechanism, nutrition, through which SES may affect health. In particular, there are important micronutrients beyond calories that are important for good health, especially for the elderly. And the intake of these nutrients may be sensitive to income, as the lowest cost staple foods in most countries (for example, bread and rice) may yield sufficient "bulk" or calories, but (unless fortified) may have low levels of vitamins, minerals and proteins. On the other hand, these foods tend to be low in fat, cholesterol, and sodium, compared to foods which may be more expensive and eaten in larger quantities by the rich, such as meat. Therefore, it is quite possible that nutrition plays a role in the relationship between health and SES, even in countries where calorie malnutrition is scarce and obesity is widespread.
In earlier work, Deaton and Paxson investigated the relationship between mortality, income, and income inequality in the United States. This paper extends their analysis to Britain. They first compare British and U.S. mortality experience over time in relation to the evolution of incomes and income inequality. They find that there is no simple relationship between income, income inequality, and the decline in mortality. Instead, the most plausible account of the data is that mortality declines are driven by technological advances. They then replicate their earlier work on U.S. birth cohorts using British data and find that, once they account for time trends, neither income nor income inequality are related to mortality.
Frontiers in Health Policy Research
The NBER's fifth annual conference on "Frontiers in Health Policy Research," organized by Alan Garber, took place on June 7 in Bethesda, Maryland. The program was:
- Jeanette Chung, University of Chicago, and David Meltzer, NBER and University of Chicago, "Effects of Competition under Prospective Payment on Hospital Costs among High and Low Cost Admissions: Evidence from California, 1982-1993" (NBER Working Paper No. 8069)
- John Cawley and Catherine McLaughlin, University of Michigan, and Michael Chernew, NBER and University of Michigan,
- "HMO Participation in Medicare Managed Care"
- Frank R. Lichtenberg, NBER and Columbia University, "The Effect of Medicare on Health Care Utilization and Outcomes"
- Mark Pauly, NBER and University of Pennsylvania, and Bradley Herring, University of Pennsylvania,
- "Cutting Taxes for Insuring: Options and Effects of Tax Credits for Health Insurance" and "Expanding Coverage Via Tax Credits: Trade-Offs and Outcomes"
- Frank A. Sloan, NBER and Duke University, "Hospital Ownership Conversion: Defining the Appropriate Public Oversight Role"
Meltzer and Chung use data from California in 1983 and 1993 on hospital charges and cost-to-charge ratios to examine the effects of competition on costs. They consider both high and low cost admissions and their costs before and after the establishment of the Medicare Prospective Payment System (PPS). Comparing persons above and below age 65, they find that competition is associated with increased costs in both age groups before PPS, but decreased costs afterwards. This is especially true among those over age 65 with the highest costs. The authors conclude that the combination of competition and prospective payment systems may result in incentives to selectively reduce spending among the most expensive patients. This implies the need to carefully monitor outcomes for the sickest patients under prospective payment systems in competitive environments.
Many health maintenance organizations (HMOs) have exited the market for Medicare managed care; since 1998 the number of participating plans has fallen from 346 to 174. Cawley, Chernew, and McLaughlin study how the equilibrium number of HMOs participating in Medicare managed care markets varies with the Health Care Financing Administration (HCFA) capitation payment. They have data from virtually every county in the continental United States, plus the District of Columbia, from 1993-2001. The authors find that in 2001, only 12.3 percent of counties in the 48 contiguous states received a HCFA payment greater than what the authors estimate is necessary to support a single HMO in the Medicare managed market. HCFA particularly appears to underestimate the payment necessary to HMOs in rural and sparsely populated areas. In order to support a single HMO in half of the U.S. counties in the year 2001, HCFA would have to pay $799.24 per average enrollee per month in the median county, the authors estimate. The high payments necessary to support HMO participation in rural counties suggest that in many U.S. counties it may not be possible to achieve both of the goals of the Medicare managed care program: to offer an attractive alternative to fee-for-service Medicare and to save money.
What impact does Medicare have on the health of the United States population? Lichtenberg's goal is to obtain precise estimates of medical utilization and outcomes, by age, for those close to age 65. Using information obtained from medical providers (hospitals and doctors) pooled over a number of years, he finds that utilization of ambulatory care and, to a much smaller extent, inpatient care, increases suddenly and significantly at age 65. This is presumably because of Medicare eligibility. The number of physician visits in which at least one drug is prescribed also jumps up at age 65. Reaching age 65 also has a strong positive impact on the consumption of hospital services, but most of this impact appears to be the result of postponement of hospitalization in the prior two years. Does this increase in utilization lead to an improvement in outcomes - a reduction in morbidity and mortality - relative to what one would expect given the trends in outcomes prior to age 65? Yes, Lichtenberg finds. The Medicare-induced increase in health care utilization leads to a reduction in days spent in bed of about 13 percent and to slower growth in the probability of death after age 65. Physician visits also appear to have a negative effect on the male death rate. Data on age-specific death probabilities every 10 years back to 1900 - both before and after Medicare was enacted - provide an alternative way to test for the effect of Medicare on longevity. The data support the hypothesis that Medicare has increased the survival rate of the elderly by about 13 percent.
What options are available in the design of refundable tax credits for health insurance purchases? What are the effects of different options, and how should they be evaluated? Pauley and Herring compare three alternative types of tax credit schemes: fixed dollar credits toward the purchase of a benchmark basic plan; proportional credits toward the purchase of a benchmark plan; and fixed dollar credits which can be used for the purchase of any plan with a premium at least as large as the credit. They show that is inappropriate to evaluate alternative credit designs primarily on their effect on the number of uninsured persons. Credits claimed by people who were already insured can have very beneficial equity and efficiency effects. Using two new modeling techniques, the authors show that credits will have very little effect until they exceed a certain threshold. Above that level, credits which cover on average about half of the premium of a benchmark policy may substantially reduce the number of uninsured, especially if they take the fixed-dollar form. These new estimates illustrate the tradeoffs in program design. The remaining key questions are what value consumers place on avoiding charity or bad debt care and what value policymakers place on increasing the level of coverage of different types of formerly uninsured persons.
In their second paper, Pauly and Herring discuss various options for using refundable tax credits to reduce the number of uninsured persons. The effect of tax credits on the number of uninsured depends on the form of the credit scheme adopted. Moreover, since large subsidies for private insurance directed to low-income persons have never been implemented, there is considerable uncertainty about the effects of various tax credit proposals. The authors find that small credits will do little to reduce the number of uninsured but that credits covering about half of the premium for a benchmark policy might have a significant effect, especially if they take a fixed-dollar form and can be used for policies with few restrictions. Finally, Pauly and Herring discuss the issues surrounding the "costs" of these credits schemes, and the policy issues raised by the uncertainty of the effects.
Sloan reviews recent empirical evidence on the effects of hospital ownership conversions on the quality of care and the provision of public goods, such as uncompensated care. He presents new results on these topics based on hospital discharge data from the Healthcare Cost and Utilization Project's (HCUP) Nationwide Inpatient Sample. His analysis reveals that conversions from government or private non-profit to for-profit ownership had no effect on in-hospital mortality, but rates of pneumonia and complications increase following conversion to for-profit status. Other research, discussed in the paper, has found increased mortality rates at one year following admission for patients admitted to hospitals that had converted to for-profit ownership. There was no effect of such conversions on the propensity to admit uninsured or Medicaid patients. Overall, the evidence suggests a role for public scrutiny of ownership conversions prior to the occurrence of such transactions.
These papers will be published by the MIT Press in an annual conference volume.
International Seminar on Macroeconomics
The NBER's 24th Annual International Seminar on Macroeconomics, organized by Jeffrey A. Frankel, NBER and Harvard University, and Francesco Giavazzi, NBER and Bocconi University, was held on June 8-9 at University College Dublin (Ireland). The following papers were discussed:
- Anne Sibert, Birkbeck College, "Monetary Policy with Uncertain Central Bank Preferences"
- Discussants: Mervyn King, NBER and Bank of England, and Lars Svensson, NBER and Stockholm University
- Arrt Kraay, World Bank, and Jaume Ventura, NBER and MIT, "The Role of Trade in International Transmission of Business Cycles"
- Discussants: Antonio Fatas, INSEAD, and James Stock, NBER and Harvard University
- Eduardo Loyo, Harvard University, "Imaginary Money"
- Discussants: Zvi Eckstein, Tel Aviv University, and Frank Smets, European Central Bank
- Raquel Fernandez, NBER and New York University, "Education, Segregation, and Marital Sorting: Theory and an Application to U.K. Data"
- Discussants: Alberto Alesina, NBER and Harvard University, and Gianluca Violante, University College London
- Romain Wacziarg, Stanford University, "Structural Convergence"
- Discussants: Tito Boeri, Universita Bocconi, and Peter Neary, University College Dublin
- Rodney Thom and Brendan Walsh, University College Dublin, "The Effect of a Common Currency on Trade: Ireland Before and After the Sterling Link"
- Discussants: William A. Branson, NBER and Princeton University, and Andrew Rose, NBER and University of California at Berkeley
- Susanto Basu, NBER and University of Michigan, and John Fernald, Federal Reserve Bank of Chicago, "Aggregate Productivity and Aggregate Technology"
- Discussants: Robert J. Gordon, NBER and Northwestern University, and Jean Imbs, London Business School
- Philip Lane, Trinity College Dublin, and Gian Maria Milesi-Ferretti, International Monetary Fund, "External wealth, the Trade Balance, and the Real Exchange Rate"
- Discussants: Barry Eichengreen, NBER and University of California at Berkeley, and Richard Portes, NBER and London Business School
Sibert analyzes the effect of unobservable central bank preferences on the actions of the central bank and on inflation. In her basic model, central bankers serve two terms. The weight that they place on output, relative to inflation, is their private information (that is, unobservable). The model shows that all but the most dovish central bankers inflate less they otherwise would in their first period in office in order to differentiate themselves from less conservative central bankers. Surprisingly, in that first period central banks also respond more to shocks than they otherwise would. Central banks may socialize central bankers, making them more conservative over time. An extension of Sibert's basic model allows central bankers' preferences to change randomly over time. If policymakers tend to become more conservative, this causes them to inflate more in their first term. Thus, the private information need not lead to lower inflation in the first period of office than in the second. A further extension of her model allows for policymakers to serve three periods in office. If the probability of a change in preferences is small, then all but the most conservative central bankers inflate less in the first period than in the second.
In industrial countries, the service sector accounts for more than two-thirds of GDP, yet trade in service accounts for only 20 percent of international trade. To a large extent this bias in trade flows reflects both technological and policy-induced barriers to trade in services that are expected to decline substantially in the next decade or two. What will be the effects of such an increase in service trade on risk sharing? Kraay and Ventura develop a stylized model of international trade and risk sharing. Since countries have different factor abundance and industries have different factor intensities, there is an incentive to trade in goods and services in order to exploit the country's comparative advantage. Because countries experience imperfectly correlated shocks to their factor productivity, there is also an incentive to trade in assets to diversify or share country risk. The authors interpret a reduction in the technological and policy barriers to trade in services as an increase in the ability to perform the first type of trade. They then explore the consequences of this reduction in barriers for the second type of trade.
Loyo considers price setting in pure units of account, linked to the means of payment through managed parities. If prices are sticky in the units in which they are set, then changes to parity may facilitate equilibrium adjustment of relative prices. Loyo derives the optimal choice of unit of account by each price setter, and the optimal parity policy. He then computes the gains for a simple calibrated economy from having multiple units of account.
Fernandez presents a model of the intergenerational transmission of education and marital sorting. Parents matter, both because of their household income and because parental human capital determines the expected value of a child's disutility from making an effort to become skilled. She shows that in the steady state an increase in segregation has potentially ambiguous effects on the fraction of individuals who become skilled, and hence on marital sorting, the personal and household income distribution, and welfare. Then, using U.K. statistics and results obtained previously for the United States, she finds that segregation is likely to have a smaller negative impact in the United Kingdom than in the United States because of the fertility and education transmission process.
Wacziarg establishes the existence of structural convergence: country pairs that converge in terms of per capita income also tend to converge in terms of their sectoral similarity, as measured by the bilateral correlation of their sectoral labor shares. This is a robust feature of the data at various levels of sectoral disaggregation and data coverage. He sheds light on some explanations for structural similarity, chiefly trade related determinants. Convergence in factor endowments accounts for approximately one-third of the extent of structural convergence. Wacziarg argues that the existence of structural convergence has important implications for our understanding of business cycles transmission, of long-run development patterns, and of the dynamics of specialization.
Thom and Walsh use the introduction of an exchange rate between Ireland and the United Kingdom in 1979 as a natural experiment to shed light on the effects of a common currency on the volume of international trade. They find that the change of exchange rate regime had no significant effect on the pattern of Irish trade. This finding casts doubt on the belief that the European Economic and Monetary Union will have a major effect on the pattern of trade between participating countries.
Aggregate productivity and aggregate technology are meaningful but distinct concepts. Basu and Fernald show that a slightly-modified Solow productivity residual measures changes in economic welfare, even when productivity and technology differ because of distortions, such as imperfect competition. Their results imply that aggregate data can be used to measure changes in welfare, even when disaggregated data are needed to measure technical change. They then present a general accounting framework that identifies several new non-technological gaps between productivity and technology, gaps reflecting imperfections and frictions in output and factor markets. They find that these gaps are important. The evidence suggests that the usual focus on one-sector models misses a rich class of important propagation mechanisms that are present only in multi-sector models.
Lane and Milesi-Ferretti examine the link between the net foreign asset position, the trade balance, and the real exchange rate. In particular, they decompose the impact of a country's net foreign asset position ("external wealth") on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, holding fixed other determinants, the negative relation between the trade balance and the real exchange rate. They also show that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.
These papers will be published in a special issue of the European Economic Review.
NBER Conference in Beijing
The fourth annual NBER-CCER Conference, jointly sponsored by the National Bureau of Economic Research and the China Center for Economic Research at Beijing University, took place in Beijing on June 22-24. The topics for the conference, which focused on China's economy, were: an overview of the Chinese economy; taxes and debt; development of the financial sector; public finance; trade and exchange rates; corporate governance; social security; and banks.
In addition to these presentations and discussions, a tour of the Legend Computers factory rounded out the three-day program. U.S. participants at this year's conference were: NBER President Martin Feldstein and Professor Shang-Jin Wei, both of Harvard University and the U.S. conference organizers; and NBER Research Associates Alan J. Auerbach, University of California, Berkeley; Charles Calomiris, Columbia University; Roger H. Gordon, University of California, San Diego; and Kathryn Dominguez and James R. Hines, University of Michigan. Also presenting a paper at the conference was Michelle White, University of California, San Diego.