Recommendations for Further Reading

American Economic Association

Recommendations for Further ReadingAuthor(s): Timothy TaylorSource: The Journal of Economic Perspectives, Vol. 27, No. 2 (Spring 2013), pp. 239-246Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/23391699 .

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Journal of Economic Perspectives—Volume 27, Number 2—Spring 2013—Pages 239-246

Recommendations for Further Reading

Timothy Taylor

This section will list readings that may be especially useful to teachers of under

graduate economics, as well as other articles that are of broader cultural interest. In

general, with occasional exceptions, the articles chosen will be expository or integrative

and not focus on original research. If you write or read an appropriate article, please

send a copy of the article (and possibly a few sentences describing it) to Timothy Taylor,

preferably by email at [email protected], or c/o Journal of Economic Perspectives,

Macalester College, 1600 Grand Ave., Saint Paul, Minnesota, 55105.

Smorgasbord

Nicholas Bloom, Erik Brynjolfsson, Lucia Foster, Ron Jarmin, Itay Saporta

Eksten, and John Van Reenen, offer a first glimpse of results from a recent Census

Bureau study of "Management in America." "[T]here is enormous dispersion of

management practices across America: 18% of establishments adopt at least 75%

of structured management practices for performance monitoring, targets and

incentives; while 27% of establishments adopt less than 50% of these practices." "

[M] ore structured management practices are tightly linked to better performance:

establishments adopting more structured practices for performance monitoring,

target setting and incentives enjoy greater productivity and profitability, higher rates of innovation and faster employment growth." US Census Bureau, Center

■ Timothy Tay bris Managing Editor, Journal of Economic Perspectives, based at Macalester

College, Saint Paul, Minnesota. He blogs at http://conversableeconomist.blogspot.com.

http://dx.doi.Org/10.1257/jep.27.2.239. doi=10.1257/jep.27.1.239



240 Journal of Economic Perspectives

for Economic Studies, CES 13-01, January 2013. At ftp://ftp2.census.gov/ces

/wp/2013/CES-WP-13-01.pdf. In the Winter 2010 issue of this journal, Bloom and

Van Reenen offered some international evidence based on a similar methodology

in "Why Do Management Practices Differ across Firms and Countries?"

Pankaj Ghemawat and Steven A. Altman have authored the DHL Global Connect

edness Index 2012. "Furthermore, while 20% (or even 30%) of goods and services

being traded across borders is far more than the same ratio mere decades ago, it is

still far short of the 90% or more that one would expect if borders and distance did

not matter at all. . . . Borders and distance still matter a great deal, implying that

even the most connected countries have substantial headroom available to partici

pate more in international trade." "The global connectedness patterns traced in

this report also highlight how distance, far from being dead, continues to depress

connectedness of all types. While the distance between a randomly selected pair of

countries is roughly 8,500 km, the average distance traversed by merchandise trade,

foreign direct investment flows, telephone calls, and human migration all cluster in

the range from 3900 km to 4750 km. This accords with the finding that most inter

national flows take place within rather than between continental regions." "While

the growth of international internet bandwidth implies that we can just as easily read

foreign news websites as domestic ones, people still overwhelmingly get their news

from domestic sources when they go online: news page views from foreign news sites

constitute 1% of the total in Germany, 3% in France, 5% in the United Kingdom and 6% in the United States (and are in single digits everywhere else sampled—as

low as 0.1% in China). Furthermore, news coverage by domestic sources itself tends

to be very domestic." At http://www.dhl.com/content/dam/flash/g0/gci_2012

/download/dhl_gci_2012_complete_study.pdf. Elroy Dimson, Paul Marsh, and Mike Staunton lay out their predictions of "The

low-return world" in the first section of the Credit Suisse Global Investment Returns

Yearbook 2013. Until a decade ago, it was widely believed that the annualized equity

premium relative to bills was over 6%. This was strongly influenced by the Ibbotson

Associates Yearbook. In early 2000, this showed a historical US equity premium of

614% for the period 1926-99. Ibbotson's US statistics appeared in numerous text

books and were applied worldwide to the future as well as the past. It is now clear

that this figure is too high as an estimate of the prospective equity premium. First, it overstates the long-run premium for the USA. From 1900-2012, the premium was a percentage point lower at 5.3%, as the early years of both the 20th and

21st centuries were relatively disappointing for US equities. Second, by focusing on the USA—the world's most successful economy during the 20th century—even

the 5.3% figure is likely to be an upwardly biased estimate of the experience of

equity investors worldwide. ... To assume that savers can confidently expect large

wealth increases from investing over the long term in the stock market—in essence,

that the investment conditions of the 1990s will return—is delusional. ... While a

low-return world imposes stresses on investors and savers in an over-leveraged world

recovering from a deep financial crisis, it provides essential relief for borrowers. The

danger here is that if this continues too long, it creates "zombies"—businesses kept



Timothy Taylor 241

alive by low interest rates and a reluctance to write off bad loans. This can suppress

creative destruction and rebuilding, and can prolong the downturn." At http://

www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf.

Claudio Borio asks "The Financial Cycle and Macroeconomics: What Have We

Learnt?" "The financial crisis that engulfed mature economies in the late 2000s has

prompted much soul searching. Economists are now trying hard to incorporate

financial factors into standard macroeconomic models. However, the prevailing, in

fact almost exclusive, strategy is a conservative one. It is to graft additional so-called

financial "frictions" on otherwise fully well behaved equilibrium macroeconomic

models . . . The main thesis is that macroeconomics without the financial cycle is

like Hamlet without the Prince. In the environment that has prevailed for at least

three decades now, just as in the one that prevailed in the pre-WW2 years, it is simply

not possible to understand business fluctuations and their policy challenges without

understanding the financial cycle." Bank of International Setttlements, Working

Paper #395, December 2012. At http://www.bis.org/publ/work395.pdf. Daniel W. Sacks, Betsey Stevenson, and Justin Wolfers discuss "The New Styl

ized Facts about Income and Subjective Well-Being." From the abstract: "In recent

decades economists have turned their attention to data that asks people how happy

or satisfied they are with their lives. Much of the early research concluded that the

role of income in determining well-being was limited, and that only income relative

to others was related to well-being. . . . Our research suggests that absolute income

plays a major role in determining well-being and that national comparisons offer

little evidence to support theories of relative income. We find that well-being rises

with income, whether we compare people in a single country and year, whether we

look across countries, or whether we look at economic growth for a given country.

Through these comparisons we show that richer people report higher well-being

than poorer people; that people in richer countries, on average, experience greater

well-being than people in poorer countries; and that economic growth and growth

in well-being are clearly related. Moreover, the data show no evidence for a satia

tion point above which income and well-being are no longer related." The paper

is available as IZA Discussion Paper No. 7105, released in December. At http://ftp

.iza.org/dp7l05.pdf. Nicholas Lardy and Nicholas Borst offer "A Blueprint for Rebalancing the

Chinese Economy." "For the past several years China's top leadership has repeat

edly described the country's current economic model as 'uncoordinated, unsteady,

imbalanced, and unsustainable.' This language is in sharp contrast to what has been

a decade of apparent success: high-speed economic growth and emergence into the

ranks of middle-income countries. What accounts for this discontinuity between

rhetoric and record? Chinese policymakers have correctly assessed that the coun

try's economic growth over the past decade has been based on superelevated levels

of investment and systematic suppression of private consumption. The resulting

capital-intensive growth model has not generated adequate gains in consumption

and employment and instead has built up significant distortions in the economy."

"The imbalances in the Chinese economy were created by distortions to three of




the most fundamental prices in the economy: interest rate, exchange rate, and

price of energy. An underdeveloped social safety net and high levels of income

inequality have exacerbated these imbalances. Rebalancing policies should focus

on allowing these key price to be more market-determined, and the government

should increase social transfers and work towards a more equitable distribution

of income." Peterson Institute for International Economics, Policy Brief PB 13-02.

February 2013. At http://www.piie.com/publications/pb/pbl3-2.pdf. This article can serve as an accompaniment to the five-paper symposium on various aspects of

China's economy in the Fall 2012 issue of this journal. The March 2013 issue of Finance & Development includes seven articles looking

ahead at economic and social issues in the Middle East region. As one example, Vali

Nasr writes: "The Arab population today numbers 400 million, which will double

to 800 million by 2050. Population growth makes aggressive economic growth an

urgent imperative. Even to tread water and maintain current living standards, the

Arab economies would need to grow at 'tiger-economy' rates of 9 to 10 percent for

a decade or more. That is a daunting task, one the public sector cannot accom

plish alone. Growth must come from the private sector, and that requires reform

of the economy: removing regulations, relaxing government control, promoting

trade, and bolstering the rule of law. . . . Middle-class entrepreneurs represent the

best hope for betterment of their countries—and the most potent weapon against

extremism and for democracy. Until now the Arab world's tiny middle class has

relied on state salaries and entitlements, with few ties to free markets. The growth of

local entrepreneurship on the back of burgeoning capitalism—and integration with

the world economy—could help change that. "

At http://www.imf.org/external

/pubs/ft/fandd/2013/03/index.htm. In "Wayward Sons: The Emerging Gender Gap in Labor Markets and Educa

tion," David Autor and Melanie Wasserman point out: "Over the last three decades,

the labor market trajectory of males in the U.S. has turned downward along

four dimensions: skills acquisition; employment rates; occupational stature; and

real wage levels." "[W]e argue first that sharp declines in the earnings power

of non-college males combined with gains in the economic self-sufficiency of

women—rising educational attainment, a falling gender gap, and greater female

control over fertility choices—have reduced the economic value of marriage for

women. This has catalyzed a sharp decline in the marriage rates of non-college U.S.

adults—both in absolute terms and relative to college-educated adults—a steep

rise in the fraction of U.S. children born out of wedlock, and a commensurate

growth in the fraction of children reared in households characterized by absent

fathers. The second part of the hypothesis posits that the increased prevalence of

single-headed households and the diminished child-rearing role played by stable male parents may serve to reinforce the emerging gender gaps in education and

labor force participation by negatively affecting male children in particular." Third Way. March 2013. At http://content.thirdway.org/publications/662/Third

_Way_Report_-_NEXT_Wayward_Sons-The_Emerging_Gender_Gap_in_Labor

_Markets_and_Education.pdf. (Full disclosure: David Autor is Editor of the Journal of Economic Perspectives. )



Recommendations for Further Reading 243

The Kaiser Family Foundation has pulled together a list of about 130 possible

Policy Options to Sustain Medicare for the Future. The five listed options that would have

the largest fiscal effect are: 1) Increase Medicare payroll tax by 1 percentage point

for all workers (worth $651 billion over 10 years) ; 2) Increasing premiums for Part B

and Part D: for example, raise Part B premiums by 2% per year until they cover

35% of total Part B expenses ($231 billion over 10 years); 3) Set Federal contribu

tions per beneficiary at the average plan bid in a given area, including traditional

Medicare as a plan, weighted by enrollment ($161 billion over 10 years); 4) Require manufacturers to pay a minimum rebate on drugs covered under Medicare Part D

for beneficiaries receiving low-income subsidies ($137 billion over 10 years); and

5) Raise the age of Medicare eligibility from 65 to 67 ($113 billion over 10 years).

January 2013. At http://www.kff.org/medicare/upload/8402.pdf. Reinhilde Veugelers investigates "The World Innovation Landscape: Asia

Rising?" "The United States is by far the biggest spender on R&D ($402 billion in

2009), accounting for about 32 percent of the global total. But the US share (not

volume) is in decline, having stood at 38 percent in 1999. The country making the

most spectacular inroad is China, which by 2009 was the second biggest spender ($154 billion), accounting for about 12 percent of the global total. Its R&D expen

diture is now similar to that of Germany, France and Italy combined. Japan has

been pushed into third place, at 11 percent ($138 billion). . . . Although other

countries, such as South Korea, are also catching up, the Chinese emergence in

science is uniquely rapid, particularly in engineering, chemistry and physics. . ..

It would be wrong to discount the Chinese innovation potential on the basis of

current performance. China clearly has the ambition to become a world-leading

innovator, creating and capturing high-tech value added, particularly in targeted

areas." Bruegel Policy Contribution, Issue 2013-02, February 2013, at http://

www.bruegel.org/publications/publication-detail/publication/766-the-world

-innovation-landscape-asia-rising/#.UWYLSjeOXKU.

From Federal Reserve Banks

David Luttrell, Harvey Rosenblum, and Jackson Thies have written an essay

on "Understanding the Risks Inherent in Shadow Banking: A Primer and Prac

tical Lessons Learned." "Through the 2007-09 financial crisis, the term 'shadow

banking' appeared in headlines and descriptions of the contagion in money and

capital markets. This paper provides a narrative of the role and inherent risks of

the shadow banking system, describing its basic functioning and development, rise

to prominence, and precipitous decline. .. . While working to ensure the current

reform effort has a chance to end bailouts, eliminate TBTF ["too big to fail"], and

promote financial stability, we should remember the lessons learned from Minsky

about boom times: The transition from hedge to speculative to Ponzi financing is a slip

pery slope of greed, perhaps accompanied by a generous dose of willful blindness—a human

tendency to see what we want to see, or are conditioned to see or overlook. In addition to




stronger regulatory standards for bank capital and liquidity, the broader financial

system encompassing banks, shadow banks, and capital markets requires greater

market discipline and changes to institutional incentives to lift the veil of obfus

cation and opacity that leads to mispriced risk. Currently, the drivers of systemic risk

remain largely intact, and shadow banking appears poised to grow considerably, and danger

ously, if it does not acquire the necessary market discipline to shape risk-taking activities. "

Federal Reserve Bank of Dallas, Staff Papers No. 18, November 2012 At http://www

.dallasfed.org/ assets/documents/research/staff/staff! 203.pdf.

Juan M. Sanchez and Emircan Yurdagul address the question "Why Are

Corporations Holding So Much Cash?" "In 2011, cash holdings [of all firms] amounted to nearly $5 trillion, more than for any other year in the series, which

starts in 1980. . . . There are two main reasons why firms find it beneficial to

hold cash: precautionary motive and repatriation taxes. The first motive is very

simple: Firms hold cash and equivalent liquid assets because they provide the

flexibility that firms need in their transactions. Two factors interact directly with

this proposed explanation: uncertainty and credit constraints. . . . The second

motive is present for multinational firms and is due to repatriation taxes. ... In

particular, taxes due to the U.S. government from corporations operating abroad

are determined by the difference between the taxes already paid abroad and

the taxes that U.S. tax rates would imply. Importantly, such taxation only takes

place when earnings are repatriated. Therefore, firms may have incentives to

keep foreign earnings abroad. As a consequence, in times of limited foreign

investment opportunities and high profitability, these funds are likely to be held

abroad in the form of cash." Regional Economist, Federal Reserve Bank of St. Louis,

January 2013, pp. 5-8. At http://www.stlouisfed.org/publications/pub_assets /pdf/re/2013/a/cash.pdf.

Discussion Starters

John B. Shoven discusses "Efficient Retirement Design." "[T]he vast majority of

people start their Social Security almost immediately upon reaching 62 or retiring.

They start collecting Social Security as soon as possible. .. . Well, workers could

separate the decision to retire from the decision to commence Social Security. They

could delay collecting Social Security and this might make sense once they learn

that monthly Social Security benefits are higher the later they are started. In fact,

monthly benefits go up for each month of delay from age 62 to age 70. Defined

contribution assets could be used to finance the deferral of Social Security instead

of financing a supplement to Social Security. It turns out that deferral is a better

strategy for most people. ... Our conclusion is that most people should be using

at least a substantial part of their retirement savings to defer Social Security rather

than supplement it. Almost no one is getting it right." Shoven presents examples

showing that retiring, living on savings for a time, and postponing when you begin

drawing on Social Security can have lifetime benefits in excess of $200,000 in



Timothy Taylor 245

plausible cases. Stanford Institute for Economic Policy Research Policy Brief, March

2013. At http://siepr.stanford.edu/publicationsprofile/2549. Bruce Everett makes a case for "Back to Basics on Energy Policy." "In June

1973, President Richard Nixon addressed the emerging energy crisis, saying that 'the answer to our long-term needs lies in developing new forms of energy.' He

asked Congress for a five-year, $10 billion budget to 'ensure the development of

technologies vital to meeting our future energy needs.' With this speech, the federal

government set out to engineer a fundamental transformation of our energy supply.

All seven subsequent presidents have endorsed Nixon's goal, and during the past

40 years, the federal government has spent about $150 billion (in 2012 dollars) on energy R&D, offered $35 billion in loan guarantees, and imposed numerous

expensive energy mandates in an effort to develop new energy sources. During this

time, many talented and dedicated people have worked hard, done some excellent

science, and learned a great deal. Yet federal energy technology policy has failed to

reshape the U.S. energy market in any meaningful way." Issues in Science and Tech

nology, Fall 2012. At http://www.issues.Org/29.l/bruce.html.

John Schmitt reviews of the controversies over the minimum wage in "Why

Does the Minimum Wage Have No Discernible Effect on Employment?" "This report

examines the most recent wave of this research—roughly since 2000—to determine

the best current estimates of the impact of increases in the minimum wage on the

employment prospects of low-wage workers. The weight of that evidence points to

little or no employment response to modest increases in the minimum wage. The

report reviews evidence on eleven possible adjustments to minimum-wage increases

that may help to explain why the measured employment effects are so consistenüy

small. The strongest evidence suggests that the most important channels of adjust

ment are: reductions in labor turnover; improvements in organizational efficiency;

reductions in wages of higher earners ("wage compression"); and small price

increases. Given the relatively small cost to employers of modest increases in the

minimum wage, these adjustment mechanisms appear to be more than sufficient

to avoid employment losses, even for employers with a large share of low-wage

workers." Center for Economic and Policy Research. February 2013. http://www

.cepr.net/documents/publications/min-wage-2013-02.pdf. The "Third Grade Follow-up to the Head Start Impact Study: Final Report"

has been published by the Office of Planning, Research and Evaluation, Admin

istration for Children and Families, US Department of Health and Human

Services. Basically, the report shows that Head Start provides short-term gains to

preschool children, but those gains have faded to essentially nothing by third

grade. The findings are summarized in this way: "In summary, there were initial

positive impacts from having access to Head Start, but by the end of 3rd grade

there were very few impacts found for either cohort in any of the four domains of

cognitive, social-emotional, health and parenting practices. The few impacts that

were found did not show a clear pattern of favorable or unfavorable impacts for

children." December 2012. At http://www.acf.hhs.gov/sites/default/files/opre

/head_start_report.pdf. The paper in this issue by Greg J. Duncan and Katherine




Magnuson, "Investing in Preschool Programs," offers a broader perspective on

these issues.

Troy R. Hawkins, Bhawna Singh, Guillaume Majeau-Bettez, and Anders

Hammer Str0mman present a "Comparative Environmental Life Cycle Assess

ment of Conventional and Electric Vehicles." We find that EVs [electric vehicles]

powered by the present European electricity mix offer a 10% to 24% decrease

in global warming potential (GWP) relative to conventional diesel or gasoline vehicles assuming lifetimes of 150,000 km. However, EVs exhibit the potential for

significant increases in human toxicity, freshwater eco-toxicity, freshwater eutro

phication, and metal depletion impacts, largely emanating from the vehicle supply

chain. Results are sensitive to assumptions regarding electricity source, use phase

energy consumption, vehicle lifetime, and battery replacement schedules. Because

production impacts are more significant for EVs than conventional vehicles ... fa] n

assumption of 100,000 km decreases the benefit of EVs to 9% to 14% with respect

to gasoline vehicles and results in impacts indistinguishable from those of a diesel

vehicle. Improving the environmental profile of EVs requires engagement around

reducing vehicle production supply chain impacts and promoting clean electricity

sources in decision making regarding electricity infrastructure." Journal of Industrial

Ecology, February 2013, vol. 17, no. 1, pp. 53-64. At http://onlinelibrary.wiley.com /doi/10.1111 /j. 1530-9290.2012.00532.x/pdf.



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