CIAO DATE: 02/2009
Volume: 28, Issue: 3
Fall 2008
Aggregate Supply-Driven Deflation and Its Implications for Macroeconomic Stability (PDF)
David Beckworth
Deflation is generally considered to be inconsistent with macroeconomic stability. Any sustained decline in the price level is widely believed to be associated with weak to negative economic growth, a lower bound of zero on the policy interest rate, and an increase in financial disintermediation. However, a number of recent studies examining both historical, cross-country experience with deflation and more recent developments find that these concerns are not necessarily associated with deflation (Selgin 1997, 1999; Cleveland Federal Reserve 1998; Stern 2003; Bordo and Redish 2004; Bordo, Lane, and Redish 2004; Bordo and Filardo 2005; Borio and Filardo 2004; Farrell 2004; King 2004; The Economist 2004, 2005; White 2006). They show that the deflationary experiences that shape the modern economic psyche, the Great Depression in the 1930s and Japan in the 1990s, are not truly representative of all deflation outcomes. These studies contend that a broader, historical perspective reveals a more nuanced view of deflation, one that requires taking seriously the possibility of both a malign deflation, a deflation originating from a collapse in aggregate demand, and a benign deflation, a deflation originating from an increase in aggregate supply
Sustained Economic Growth: Do Institutions Matter, and Which One Prevails? (PDF)
Abdoul' Ganiou Mijiyawa
In 1965, the growth rate of per capita GDP in Niger and Nigeria was 2.1 percent and 4.2 percent, respectively, and 2.9 percent in Botswana. From 1966 to 1969, however, Niger and Nigeria recorded a negative growth rate, while Botswana continued to experience a positive growth rate over the same period. In 1990, the growth rate of per capita GDP was 1 percent in Ghana and 5.2 percent in Nigeria. Yet, from 1991 to 1994, the growth rate was negative in Nigeria and positive in Ghana. Why does the trajectory of economic growth episodes differ among countries? In other words, why is economic growth more sustainable in some countries than in others?
Censoring and Destroying Information in the Information Age (PDF)
J. R. Clark, Dwight R. Lee
Almost everyone knows the importance of information and communication to economic progress. The more information we have the more productive we can be, both individually and collectively. The easier it is for us to communicate our information to others and to receive their information, the more likely we will make production and consumption choices that serve the interests of all. No wonder people are so impressed with the recent breakthroughs in information and communication technology that have moved us into what has become known as the “information age.” Who could possibly condone, much less recommend, policies that destroy and distort valuable information by censoring its communication? Far more than you might think!
State Fiscal Crises: Are Rapid Spending Increases to Blame? (PDF)
J. R. Clark, Dwight R. Lee
During recessions, state governments frequently face substantial midyear budget shortfalls. Numerous states are now experiencing such crises again. These fiscal crises are often blamed on the cyclical decline in revenue growth or reductions in federal aid. Others have suggested that enacting rapid spending increases during expansionary years—rather than using the revenue windfalls for tax cuts or increases in rainy day funds—may be an important contributing factor to those budget shortfalls. Using data from the 2001 recession, we find support for that “overspending” hypothesis. While neither the mere presence nor the size of a rainy day fund were significant predictors of fiscal stress, faster increases in spending are positively and significantly associated with fiscal stress. When rainy day funds work, it is the strength of their withdrawal rules that matter. These results have important implications for fiscal policy choices. States that restrain spending growth during expansionary years and implement strong rainy day fund withdrawal rules are likely to face less severe fiscal crises during recessions.
Small States: Not Handicapped and Under-Aided, but Advantaged and Over-Aided (PDF)
Swaminathan S. Anklesaria Aiyar
Small states have long been viewed by international organizations as a special category with special handicaps requiring special assistance. The United Nations has created an Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries, and Small Island Developing States. The very wording makes it clear that the UN regards small developing states that are landlocked or islands as being on par with the least developed countries. A very substantial academic literature has been devoted to small states, to which the World Bank and Commonwealth Secretariat have made contributions. They constituted a Joint Task Force that submitted a report in April 2000, Small States: Meeting Challenges in the Global Economy, proposing an agenda for assisting such states in various ways, including increasing foreign aid (World Bank 2000). This report was followed in 2005 by a review of progress on the 2000 agenda, Towards an Outward-Oriented Development Strategy for Small States (Briguglio, Persaud, and Stern 2005), henceforth referred to as the World Bank-Commonwealth review. This review also suggested increasing foreign aid. In 2006, the Independent Evaluation Group (IEG 2006) of the World Bank produced an evaluation of World Bank assistance to small states. During that same year, the World Bank also commissioned four regional studies of small states, which formed the basis of a subsequent book, Small States, Smart Solutions (Favaro 2008). Finally, in 2008, the World Bank released The Growth Report, also known as the Spence Commission report, which devoted a special section to small states (World Bank 2008).
Parental Valuation of Charter Schools and Student Performance (PDF)
James VanderHoff
Students enrolled in charter schools increased by 81 percent from 2002 to 2007, and the number of charter schools increased by 52 percent.1 Nevertheless, many studies indicate students in charter schools do not score as highly on standard tests as students in traditional public schools. Do parents choose academically inferior schools for their children because other factors are more important? The significance of that question stems from the requirement of scholastically motivated parental choice for competition-induced improvement in public schools. Milton Friedman (1962) and others have argued that parental choice would stimulate public schools to be more academically effective, because dissatisfied parents would move their children from inferior to superior schools, including public charter schools.
Cold Case Files: The Athenian Grain Merchants, 386 B.C. (PDF)
Wayne R. Dunham
Food price increases have always been politically sensitive. Price spikes like those that have occurred recently create the demand for action on the part of government to alleviate the problem. Yet, government intervention can often do more harm than good. This article examines one such example of a counterproductive response that occurred in 388 B.C. in Athens, Greece. In response to a negative supply shock to the grain market, regulators encouraged grain importers to form a buyers’ cartel (monopsony), hoping that it would reduce retail prices by first lowering wholesale grain prices. In reality, the decrease in wholesale prices resulted in a decrease in the willingness of producers in other regions to supply grain to Athens, and retail grain prices increased substantially. Grain importers soon found themselves on trial for their lives in what is probably the earliest recorded antitrust trial. This article uses the information presented at that trial and other contemporary sources to evaluate the grain merchants’ actions. More generally, it analyses the impact of a buyer’s cartel or monopsony on prices and consumption.
State Sanctions and the Decline in Welfare Caseloads (PDF)
Michael J. New
Much of the scholarship analyzing fluctuations in welfare caseloads focuses on such factors as the strength of the economy and the generosity of welfare benefits. However, with the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in 1996, states obtained significantly more control over welfare policy. Despite this shift, there has been relatively little academic research on the role of state policy variation in welfare caseload fluctuations. This article provides solid evidence that strength of state sanctioning policies, which give caseworkers the ability to restrict the benefits of welfare recipients, has played a very significant role in recent welfare caseload declines. A comprehensive regression analysis of welfare caseloads from all 50 states from every year from 1996 to 2002, finds that strong state sanctioning policies are highly correlated with both large welfare caseload declines and low caseload levels.
Creating Financial Harmony: Lessons for China (PDF)
James A. Dorn
The current turmoil in global financial markets, which began with the U.S. subprime crisis in 2007, has shed a bad light on market liberalism. But it was the socialization of risk—not private free markets— that precipitated the crisis. Government sponsored enterprises (GSEs), not private enterprises, politicized investment decisions and overextended credit to high-risk households by buying up and guaranteeing subprime and Alt-A mortgages.1 Financial innovation and the information revolution allowed greater specialization and diversification of risk, but government backing of GSE debt created a moral hazard problem and, together with loose monetary policy and flawed regulations, led to excessive risk taking and overinvestment in housing. When housing prices began to decline in 2007, defaults spread and banks failed. Toxic assets rapidly mounted and the housing crisis morphed into a general credit crisis.
Termites in the Trading System: How Preferential Agreements Undermine Free Trade by Jagdish Bhagwati (PDF)
Daniel Griswold
The Swiss National Bank: 1907–2007 by Werner Abegg, Ernst Baltensperger, et al., contributors (PDF)
Kurt Schuler
Ike Brannon
Forgotten Continent: The Battle for Latin America's Soul by Michael Reid (PDF)
Juan Carlos Hidalgo
Brendan Rittenhouse Green