The Spring 2013 issue of my own Journal of Economic Perspectives has two main symposia: one on "The Growth of the Financial Sector," and one on "Early and Late Interventions." It also has several individual articles on topics like the the political reasons why good economics can make for bad policy outcomes, Latin America's social policy challenge, and the investment strategies of sovereign wealth funds. The back of the issue has my own "Recommendations for Further Reading" column, and some correspondence about neuroscience and economics.
I'll probably do some blogging about specific articles in the next week or so, but for now, here's a list of the articles, with abstracts and links. Like all issues of JEP back to the first issue in 1987, this issue is freely available on-line compliments of the American Economic Association. It's also possible to go to the JEP website and download the journal in a format that works on an e-reader.
Symposium: The Growth of the Financial Sector
"The Growth of Finance," by Robin Greenwood and David Scharfstein
The
US financial services industry grew from 4.9 percent of GDP in 1980 to
7.9 percent of GDP in 2007. A sizeable portion of the growth can be
explained by rising asset management fees, which in turn were driven by
increases in the valuation of tradable assets, particularly equity.
Another important factor was growth in fees associated with an expansion
in household credit, particularly fees associated with residential
mortgages. This expansion was fueled by the development of nonbank
credit intermediation (or "shadow banking"). We offer a preliminary
assessment of whether the growth of active asset management, household
credit, and shadow banking -- the main areas of growth in the financial
sector -- has been socially beneficial.
Full-Text Access |
Supplementary Materials
"Finance: Function Matters, Not Size," by John H. Cochrane
It's
fun to pass judgment on waste, size, usefulness, complexity, and
excessive compensation. But as economists, we have an analytical
structure for thinking about these questions. "I don’t understand it"
doesn't mean "it's bad," or "regulation will improve it." That attitude
pervades policy analysis in general and financial regulation in
particular, and economists do the world a disservice if we echo it. I
will not offer a competing black box [to explain the size of the finance
industry]. I don’t claim to estimate the socially optimal "size of
finance" at, say, 8.267 percent of GDP. It's just the wrong question.
Hayek and the failure of planning should teach us a little modesty:
Pronouncing on socially optimal industry size is a waste of time. Is the
finance industry functioning well? Are there identifiable market or
government distortions? Will proposed regulations help or make matters
worse? These are useful questions.
Full-Text Access |
Supplementary Materials
"Moore's Law versus Murphy's Law: Algorithmic Trading and Its Discontents," by Andrei A. Kirilenko and Andrew W. Lo
Financial
markets have undergone a remarkable transformation over the past two
decades due to advances in technology. These advances include faster and
cheaper computers, greater connectivity among market participants, and
perhaps most important of all, more sophisticated trading algorithms.
The benefits of such financial technology are evident: lower
transactions costs, faster executions, and greater volume of trades.
However, like any technology, trading
technology has unintended consequences. In this paper, we review key
innovations in trading technology starting with portfolio optimization
in the 1950s and ending with high-frequency trading in the late 2000s,
as well as opportunities, challenges, and economic incentives that
accompanied these developments. We also discuss potential threats to
financial stability created or facilitated by algorithmic trading and
propose "Financial Regulation 2.0," a set of design principles for
bringing the current financial regulatory framework into the Digital
Age.
Full-Text Access |
Supplementary Materials
"An International Look at the Growth of Modern Finance," by Thomas Philippon and Ariell Reshef
We
study the rise of finance across a set of now-industrial economies. The
long-run pattern of the growth of the income share of finance from the
nineteenth century to current times in the United States is similar to
some economies, but not all economies reach the same size and instead
reach a plateau. The relationship between financial output and income is
nonhomothetic and changes three times in this sample. Most of the
increase in real GDP per capita from 1870 occurred while financial
output and the income share of finance were smaller than their size in
1980. After 1980 the elasticity of income with respect to financial
output falls significantly. We find considerable heterogeneity in the
size of finance in recent times. There is no evidence for an increase in
the unit cost of financial intermediation. We find that information
technology and financial deregulation can help explain the increase in
relative skill intensity and in relative wages in finance, while common
trends, which may be related to financial globalization, also play a
role.
Full-Text Access |
Supplementary Materials
"Asset Management Fees and the Growth of Finance," by Burton G. Malkiel
From
1980 to 2006, the financial services sector of the US economy grew from
4.9 percent to 8.3 percent of GDP. A substantial share of that increase
was comprised of increases in the fees paid for asset management. This
paper examines the significant increase in asset management fees charged
to both individual and institutional investors. One could argue that
the increase in fees charged by actively managed funds could prove to be
socially useful if it reflected increasing returns for investors from
active management or if it was necessary to improve the efficiency of
the market for investors who availed themselves of low-cost passive
(index) funds. But neither of these arguments can be supported by the
data. Actively managed funds of publicly traded securities have
consistently underperformed index funds, and the amount of the
underperformance is well approximated by the difference in the fees
charged by the two types of
funds. Moreover, it appears that there was no change in the efficiency
of the market from 1980 to 2011. Thus, the increase in fees is likely to
represent a deadweight loss for investors. Indeed, perhaps the greatest
inefficiency in the stock market is in "the market" for investment
advice.
Full-Text Access |
Supplementary Materials
Symposium on Early and Later Interventions
"Investing in Preschool Programs," by Greg J. Duncan and Katherine Magnuson
We summarize the available evidence on the extent to which expenditures on early childhood
education
programs
constitute
worthy
social
investments
in
the
human
capital
of
children.
We
provide
an
overview
of
existing
early
childhood
education
programs,
and
then
summarize
results
from
a
substantial
body
of
methodologically
sound
evaluations
of
the
impacts
of
early
childhood
education.
The
evidence
supports
few
unqualified
conclusions.
Many
early
childhood
education
programs
appear
to
boost
cognitive
ability
and
early
school
achievement
in
the
short
run.
However,
most
of
them
show
smaller
impacts
than
those
generated
by
the
best-known
programs,
and
their
cognitive
impacts
largely
disappear
within
a
few
years.
Despite
this
fade-out,
long-run
follow-ups
from
a
handful
of
well-‐known
programs
show
lasting
positive
effects
on
such
outcomes
as
greater
educational
attainment,
higher
earnings,
and
lower
rates
of
crime.
It
is
uncertain
what
skills,
behaviors,
or
developmental
processes
are
particularly
important
in
producing
these
longer-‐run
impacts.
Our
review
also
describes
different
models
of
human
development
used
by
social
scientists,
examines
heterogeneous
results
across
groups,
and
tries
to
identify
the
ingredients
of
early
childhood
education
programs
that
are
most
likely
to
improve
the
performance
of
these
programs.
Full-Text Access |
Supplementary Materials
"What Can Be Done to Improve Struggling High Schools?," Julie Berry Cullen, Steven D. Levitt, Erin Robertson and Sally Sadoff
In
spite of decades of well-intentioned efforts targeted at struggling
high schools, outcomes today are little improved. A handful of
innovative programs have achieved great success on a small scale, but
more generally, the economic futures of the students at the bottom of
the human capital distribution remain dismal. In our view, expanding
access to educational options that focus on life skills and work
experience, as opposed to a focus on traditional definitions of
academic success, represents the most cost-effective, broadly
implementable source of improvements for this group.
Full-Text Access |
Supplementary Materials
"Beyond BA Blinders: Lessons from Occupational Colleges and Certificate Programs for Nontraditional Students," by James E. Rosenbaum and Janet Rosenbaum
Postsecondary
education mostly focuses on the four-year BA degree. Community colleges
are often promoted as the first step toward the ultimate goal of a
four-year degree. However, community colleges have extremely poor degree
completion rates. There is evidence suggesting better results for their
private, two-year counterparts -- particularly for certificate
completion. We
will focus on occupational colleges -- private accredited colleges that
offer career preparation in occupational fields like health care,
business, information technology, and others. These institutions
challenge many of our preconceptions about college. They are less wedded
to college traditions, which raises some interesting questions: Do
private colleges offering certificates or AA degrees use different
procedures? Should community colleges consider some of these procedures
to reduce student difficulties and improve their completion rates? For
many community college students, earning a more likely, quick sub-BA
credential -- perhaps followed by a four-year degree in the future --
will be preferable to the relatively unlikely pathway from a community
college program directly to a four-year BA. In sum, this paper suggests
that nontraditional colleges and nontraditional credentials
(certificates and AA degrees) deserve much closer attention from
researchers, policymakers, and students.
Full-Text Access |
Supplementary Materials
Individual Articles
"Economics versus Politics: Pitfalls of Policy Advice," Daron Acemoglu and James A. Robinson
The
standard approach to policy making and advice in economics implicitly
or explicitly ignores politics and political economy and maintains that
if possible, any market failure should be rapidly removed. This essay
explains why this conclusion may be incorrect; because it ignores
politics, this approach is oblivious to the impact of the removal of
market failures on future political equilibria and economic efficiency,
which can be deleterious. We first outline a simple
framework for the study of the impact of current economic policies on
future political equilibria -- and indirectly on future economic
outcomes. We then illustrate the mechanisms through which such impacts
might operate using a series of examples. The main message is that sound
economic policy should be based on a careful analysis of political
economy and should factor in its influence on future political
equilibria.
Full-Text Access |
Supplementary Materials
"Latin America's Social Policy Challenge: Education, Social Insurance, Redistribution," by Santiago Levy and Norbert Schady
Long
regarded as a region beset by macroeconomic instability, high
inflation, and excessive poverty and inequality, Latin America has
undergone a major transformation over the last 20 years. The region has
seen improved macroeconomic management and substantial and sustained
reductions in poverty and inequality. In this paper, we argue that
social policy, including human capital and education, social insurance,
and redistribution, need special attention if achievements of the last
two decades are to be sustained and amplified. Starting in the mid
1990s, many governments in the region introduced a variety of programs,
including noncontributory pensions and health insurance, and cash
transfers targeted to the poor. Social spending in Latin America
increased sharply. These policies have been widely praised, and we
believe they have resulted in substantial improvements in the lives of
the poor in the region. However, a more nuanced view shows some
worrisome trends. Moving forward, we believe it is necessary to pay much
closer attention to the quality of services, particularly in education;
to the incentives generated by the interplay of some programs,
particularly in the labor market; to a more balanced intertemporal
distribution of benefits, particularly between young and old; and to
sustainable sources of finance, particularly to the link between
contributions and benefits.
Full-Text Access |
Supplementary Materials
"The Investment Strategies of Sovereign Wealth Funds," Shai Bernstein, Josh Lerner and Antoinette Schoar
Sovereign
wealth funds have emerged as major investors in corporate and real
resources worldwide. After an overview of their magnitude, we consider
the institutional arrangements under which many of the sovereign wealth
funds operate. We focus on a specific set of agency problems that is of
first-order importance for these funds: that is, the direct involvement
of political leaders in the management process. We show that sovereign
wealth funds with greater involvement of political leaders in fund
management are associated with investment strategies that seem to favor
short-term economic policy goals in their respective countries at the
expense of longer-term maximization of returns. Sovereign wealth funds
face several other issues, like how best to cope with demands for
transparency, which can allow others to copy their investment
strategies, and how to address the problems that arise with sheer size,
like the difficulties of scaling up investment strategies that only work
with a smaller value of assets under investment. In the conclusion, we
discuss how various approaches cultivated by effective institutional
investors worldwide -- from investing in the best people to pioneering
new asset classes to compartmentalizing investment activities -- may
provide clues as to how sovereign wealth funds might address these
issues.
Full-Text Access |
Supplementary Materials
"Recommendations for Further Reading," by Timothy Taylor
Full-Text Access |
Supplementary Materials
Correspondence: Are Cognitive Functions Localizable? Colin Camerer et al. versus Marieke van Rooij and John G. Holden
Full-Text Access |
Supplementary Materials
