Naked Economics, Wheelan, Charles [open ebook .txt] 📗

Or we can imagine a sub-Saharan Africa scenario in which countries stumble from decade to decade without any significant economic growth at all. One scenario will lift billions of people out of poverty and misery; the other won’t.

When we ask whether poor countries will still be poor four decades from now, the question seems distant and abstract, almost as if the answer will be determined by some future alignment of the stars. But when we break that question into its component parts—when we ask about the things that we know will distinguish rich countries from poor countries—then global poverty seems more tractable. Will governments in developing countries create and sustain the kinds of institutions that support a market economy? Will they develop export industries that enable them to break out of the trap of subsistence agriculture—and will the United States open its huge market to those products? Will the rich countries use their technology and resources to fight the diseases that are ravaging the developing world, especially AIDS? Will the family of a baby girl born tomorrow in rural India have an incentive to invest in her human capital?

Can America get its fiscal house back in order? The United States is the world’s largest debtor. We owe Chinese bondholders more than a trillion dollars. We’ve had to borrow heavily to pay our bills for the past decade. The sobering part is that some of our most significant government expenses lie ahead as the Baby Boomers retire and begin to claim Social Security and Medicare. The “peace dividend” at the end of the Cold War lasted about 45 minutes, so we seem stuck with large defense budgets for the foreseeable future. Math is math; every reasonable calculation I’ve seen shows that our fiscal trajectory is unsustainable.

So what will we do about it? U.S. society has developed not merely an aversion to higher taxes, but a palpable hostility. That would be fine if we were willing to trim government to a size that we could fund. But we haven’t done that either.

Think about what that means. Going forward, somehow we have to raise enough revenue to (1) pay for whatever government we choose to have, which we aren’t doing fully now; (2) pay the interest we’ve accumulated on past bills; and (3) pay for the new expenses associated with an aging population and expensive entitlement promises.

That’s going to require serious political leadership and recognition by Americans that the status quo is not an option. Simon Johnson, who had plenty of experience with financial crises as the former chief economist for the International Monetary Fund, has noted, “Overborrowing always ends badly, whether for an individual, a company, or a country.”5 During the first decade of the new millennium, three parties borrowed heavily: consumers, financial firms, and the U.S. government. So far, two have paid a huge price for that leverage. Is there another shoe to drop?

Those are just my questions. My hope is that by now you have more of your own. The remarkable thing about economics is that once you’ve been exposed to the big ideas, they begin to show up everywhere. The sad irony of Econ 101 is that students too often suffer through dull, esoteric lectures while economics is going on all around them. Economics offers insight into wealth, poverty, gender relations, the environment, discrimination, politics—just to name a few of the things we’ve touched upon. How could that possibly not be interesting?

Notes

Introduction

1.Thomas Friedman, “Senseless in Seattle,” New York Times, December 1, 1999.

2.Claudia Goldin and Cecilia Rouse, “Orchestrating Impartiality: The Impact of ‘Blind’ Auditions on Female Musicians,” American Economic Review, September 2000.

3.Charles Himmelberg, Christopher Mayer, and Todd Sinai, “Assessing High House Prices: Bubbles, Fundamentals and Misperceptions,” Journal of Economic Perspectives, vol. 19, no. 4 (Fall 2005).

4.David Brooks, “An Economy of Faith and Trust,” New York Times, January 16, 2009.

CHAPTER 1. THE POWER OF MARKETS

1.M. Douglas Ivester, Remarks to the Economic Club of Chicago, February 25, 1999.

2.Stephen Moore and Julian Simon, The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years, Cato Institute Policy Analysis, No. 364 (Washington, D.C.: Cato Institute, December 15, 1999).

3.Cara Buckley, “A Man Down, a Train Arriving, and a Stranger Makes a Choice,” New York Times, January 3, 2007.

4.Michael Grossman, “Health Economics,” NBER Reporter, Winter 1998/99.

5.“America Then and Now: It’s All in the Numbers,” New York Times, December 31, 2000.

6.“Relieving O’Hare,” The Economist, January 10, 1998.

7.June 21, 2001, p. A1.

8.David Kushner, “The Latest Way to Get Cocaine Out of Colombia? Underwater,” New York Times Sunday Magazine, April 26, 2009.

9.Michael Cooper, “Transit Use Hit Five-Decade High in 2008 as Gas Prices Rose,” New York Times, March 9, 2009.

10.Fernando A. Wilson, Jim Stimpson, and Peter E. Hilsenrath, “Gasoline Prices and Their Relationship to Rising Motorcycle Fatalities, 1990–2007,” American Journal of Public Health, vol. 99, no. 10 (October 2009).

11.Jaime Sneider, “Good Propaganda, Bad Economics,” New York Times, May 16, 2000, p. A31.

12.Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven, Conn.: Yale University Press, 2008).

13.Press release from The Royal Swedish Academy of Sciences, October 9, 2002.

14.Jonathan Gruber, “Smoking’s ‘Internalities,’” Regulation, vol. 25, no. 4 (Winter 2002/2003).

15.Annamaria Lusardi, “The Importance of Financial Literacy,” NBER Reporter: Research Summary, no. 2 (2009).

16.Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985).

CHAPTER 2. INCENTIVES MATTER

1.Costa Rican Embassy, Washington, D.C.

2.Ian Fisher, “Victims of War: The Jungle Gorillas, and Tourism,” New York Times, March 31, 1999.

3.Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon & Schuster, 1998), pp. 216–17.

4.“Paying Teachers More,” The Economist, August 24, 2000.

5.David Stout, “Child Safety Seats to Be Required for Commercial Planes,” New York Times, December 16, 1999, p. A20.

6.Julia Preston, “Mexico’s Political Inversion: The City That Can’t Fix the Air,” New York Times, February 4, 1996, Sect. 4, p. 4.

7.Ibid.; Lucas W. Davis, “The Effect of Driving Restrictions